Building Rome in a day The sustainability of China’s housing boom

A report from the Economist Intelligence Unit’s Access China service

growth rates should remain strong. rather than pointing to a collapse or a plateau in housing activity in the next decade. In the decade leading up to 2010. In per head terms. China’s urban population is forecast to continue to grow until 2039. or about the same number as Japan’s current total housing stock. This equates to US$11.1% or over 160m people. Residential floor space per head in urban areas will increase from 30 sq metres (in 2008) to 41 sq metres by 2020. China can build a city the size of Rome in only two weeks. we expect a total of Rmb75trn to be spent on real estate investment over the decade to 2020. real income growth and exchange-rate appreciation underpin this assertion. As a result. putting increased pressure on global markets for iron ore and oil. although there could be a short-term mild correction.6-fold to Rmb51. the average amount of floor space per urban Chinese person has doubled over the same period.5trn at today’s exchange rate. The Economist Intelligence Unit’s new models of population and incomes in China’s cities point to strong underlying demand for housing throughout the next decade. China’s housing boom will present opportunities for investors in sectors such as furniture. They indicate that housing demand in China is growing so quickly that a correction in the next couple of years will be short-lived. given the country’s income levels.Building Rome in a day The sustainability of China’s housing boom Executive summary C hina is not facing a major housing bubble. Continued strong growth in the housing sector over the decade to 2020 will also lead directly and indirectly to almost 40% growth in demand for steel and similarly strong growth in energy demand. while urban per head disposable incomes will increase by 2. we expect China’s urban population to increase by 26. Chinese floor space per head is already high by international standards. although they should steadily ease.310 (about US$7. cars and building materials. an amount equivalent to almost five times the total current annual GDP in the UK. The cumulative value is substantial—using the Chinese fixed asset investment measure. China built houses equivalent to roughly twice the total number of houses currently in Spain or the UK. However. 1 © The Economist Intelligence Unit Limited 2011 . A combination of urban population growth. but real estate assets in renminbi are likely to be one of the best-performing global asset classes over the next decade. Between 2011 and 2020.500 at current exchange rates). We do not include a forecast for house prices in this report. At current rates of construction.

354m sq m.500 1. Fortunately. But at China’s current rates of construction. it would take roughly two weeks. It took the Asian hyper-economy roughly a decade to build the equivalent of China: building Europe in 15 years (sq m.000 3. Although China’s housing sector is likely to face a correction in the short term. various countries Newly completed residential floor space (China) 4.500 2. for example in Japan and the US.000 500 0 2 Note. Perhaps Rome cannot be built in a day.500 1. Eurostat. underlying demand—driven primarily by incomes and urban population growth—for bigger and better housing is growing so rapidly that such an adjustment would be shortlived.000 1999 2000 2001 2002 2005 2003 2004 1. National statistics offices. China’s unique demographic circumstances also go some way to explain why demand for housing has been so explosive. Burst housing bubbles.Building Rome in a day The sustainability of China’s housing boom China’s love affair with property S oaring house prices in Chinese cities have led to widespread concerns over a Dubai-style property bubble. m) Residential floor space stock.500m sq m. Residential floor space completed in China. Existing residential floor space of 12 countries shown = 17.000 3. occurred in countries with stable demographics and without strong longer-term growth prospects.000 2.000 2.500 2.000 1. In an economy that is building as much housing each year as there is in all of Spain (nearly 2bn sq metres).500 3. 2008 . the repercussions of a major collapse would be severe enough to send the world into a mini-recession and to cause serious damage to resource-focused economies. © The Economist Intelligence Unit Limited 2011 Sources: UNECE.500 3. 1999-2000 = 17.000 500 0 Czech Republic Sweden Portugal Greece Poland Netherlands Turkey Spain UK Italy France Germany 2006 2007 2009 2010 4. such concerns are overblown.

In 2010 new residential floor space completed in China reached 1. 3 © The Economist Intelligence Unit Limited 2011 . conducted in 2005. numbering over 1. and there are few signs that the seemingly insatiable appetite of Chinese consumers for bigger and better housing will slow substantially. That may seem unsurprising for a country with 1. all property belonged to the state) in the late 1990s. dabbling in real estate has become something of a national sport. China already has the world’s largest stock of housing.1bn. enjoy less than one-half of the total living space of their Chinese counterparts. one of the highest such rates in the world. Since property markets were liberalised (previously.8bn sq metres. In per head terms. it took China approximately 15 years to build the equivalent of Europe’s entire housing stock.3bn people. The last published large-scale population survey. With 41. the average amount of floor space per urban Chinese person has doubled over the same period. but Indian residents. revealed that 88% of households lived in self-owned housing.Building Rome in a day The sustainability of China’s housing boom Europe’s entire housing stock (excluding Turkey). slightly less than the entire housing stock of Spain.6bn sq metres of residential floor space in place in 2009. Likewise.

at just over 30 sq metres. for instance.110 44.010 3.9 396.3 10. such as the US. there are more factors than income that determine living space across countries.080 82. What truly stands out. while those below it show the opposite tendency. depending on the country.340 5. going some way to explain why Japanese people live in such small spaces (capsule hotel. The graph below shows the relationship between GDP per head (PPP) and residential floor space per head.3 115. given the country’s current income levels.970 66.5 1.8 50. residential floor space data are for 2000-06.3 26. however. is extraordinarily high. a country at China’s level of GDP per head (PPP) “ought” to have 20. China remains the most overhoused country among the 35 listed.3 31. By contrast. Source: Economist Intelligence Unit. US$) Data for some countries are Economist Intelligence Unit estimates.a India China Russia UK Japan US Urban population (% of total pop) Households Average no. Countries lying above the curve. per household Residential floor space per head (sq metres) a b b 30. According to the curve. for instance.Building Rome in a day The sustainability of China’s housing boom Too much housing? Selected household indicators. which would mean that China is 53% “overhoused”. What are the causes and implications of “overhousing”? This is a difficult question to answer. Japan’s population density is over ten times that of the US and nearly three times that of China.930 2.6 35.870 72. The line represents the best-fitting curve for the 35 countries depicted. plays a prominent role. Owing to limited data availability. It 4 © The Economist Intelligence Unit Limited 2011 .990 2. Japan.7 64.970 Personal disposable income (per head.5 23.200 2. the US is only 15% overhoused. is that China’s average living space per head.4 35. stands out as being a rich country with relatively small properties.6 – 6. Clearly.0 1. But even after controlling for population density. anyone?).050 90. Population density.1 223. have relatively high levels of living space per head.5 33.3 sq metres of living area.0 26. 2010.140 2.6 53.

The one-child policy has clearly played an important role. The number of single-member households in China increased from 8.000 60. but as they are currently at such a low level they are having minimal impact. there are also a number of noteworthy characteristics in Chinese society that may account for the country’s housing exuberance: l Property sector taxation: The absence of a significant nationwide property tax. l Gender imbalance: China has the world’s most skewed gender ratio among young people. Economist Intelligence Unit estimates.000 20.3 persons (2.Building Rome in a day The sustainability of China’s housing boom Growth and house size (circle area represents total residential floor space stock) 80 80 70 US 70 60 Residential floor space per capita (sq m) 60 Residential floor space per capita (sq m) 50 Germany 40 Luxembourg 50 40 30 China Japan 30 20 20 10 India 10 0 0 10. combined with a materialistic approach to marriage. which has multiple implications for housing. l Small households: The average size of a Chinese household is 3. National statistics offices. while the former must try harder.7% in 2005.000 50.8 for urban households). such as that enforced in most other countries. China has just begun to experiment with property taxes.000 0 Sources: UNECE. often 5 © The Economist Intelligence Unit Limited 2011 .000 GDP per capita (US$ PPP) 40. but ageing will also contribute to the growth of single households (men tend to die earlier than women). However. could simply be the case that Chinese prefer large apartments to other goods and services. Eurostat.3% of total households in 2000 to 10.000 30. Young men thus save feverishly. A higher ratio of men to women in China means that the latter can be more selective about their spouses. is the reason behind China’s high household savings rate. as will the gender imbalance and changing family values. which is relatively low for a developing country. A small but thorough pool of researchers contend that gender imbalance. greatly boosts the attractiveness of real estate in China.

It is difficult to obtain objective benchmarks on building quality across countries. the quality of buildings is likely to be on a different level. to be able to offer their desired partners a suitably impressive home. but anecdotal evidence from China certainly suggests lower-quality construction. a researcher at the Chinese Academy of Social Sciences. “Tofu projects”. became the subject of much public consternation 6 © The Economist Intelligence Unit Limited 2011 . l Building quality: While Chinese citizens enjoy living space that is almost on a par with their much richer Japanese counterparts. the average lifespan of a Chinese building is 30 years. as they are known.Building Rome in a day The sustainability of China’s housing boom with the help of their parents. compared with 132 years in the UK. According to Pan Jiahua.

Building Rome in a day The sustainability of China’s housing boom China’s construction boom moves inland following the 2008 Sichuan earthquake. so it is quite possible that there is a trade-off between home size and building quality. sq m) Above 36 33 to 36 30 to 33 27 to 30 24 to 27 Less than 24 No data for ethnic autonomous prefectures Source: National Bureau of Statistics. Residential floor space per head in 2009 (urban. 7 © The Economist Intelligence Unit Limited 2011 . Shoddier construction holds costs down.

Here we again use our models to answer the question of what this growth means for China’s housing boom—will it be sustained and where will it occur? We then show what this boom means for China’s total demand for steel and energy. primarily because colder temperatures make larger houses more costly to heat. a freezing rustbelt town. Today. and finishing at the bottom with Suihua. which is a trend seen across the world. In general. that goal looks well within reach. Shanghai and Guangzhou are all below the national average in per-head floor space. includes a target of 35 sq metres per head by 2020.Building Rome in a day The sustainability of China’s housing boom I n our 2010 report. and this is likely to remain the case given their increasingly crowded conditions. Only prefectures with a forecast urban population of over 2m by 2020 are shown. as articulated by the Ministry of Construction in 2004. developments that will shape global markets over the coming decade. at 54 sq metres per head. A number of cities have Cities becoming “well off” in the next decade (exceeding 35 sq metres per head in living space per head) Liaocheng Jiaozuo Qujing Xinxiang Xianyang Mianyang Hohhot Cangzhou Changzhou Wuxi 2019 Huanggang Yulin Shangqiu Zhoukou 2012 Xuchang Baotou Yangzhou Quanzhou Linyi 2013 2014 Taizhou Tianjin Chongqing 2015 2016 Zhongshan Xinyang Jinhua Jiujiang Yueyang Nanning Nanyang Foshan Changsha Xiangtan Lianyungang Anyang Zhumadian Ganzhou Heze Zunyi Xi'an Zhengzhou 2017 2018 Huaian Zhenjiang Changde Jiaxing Xiangyang Pingdingshan Liuzhou Suzhou Hangzhou Wuhan Chengdu Note. an export manufacturing boomtown. Larger cities in China also tend to have less living space per head. starting at the top with Dongguan. we used our demographic and macroeconomic models covering 287 Chinese cities to show both the broad scope and rapid pace of growth of Chinese cities over the next ten years. 2020 Dezhou Nanchong Huaihua Shangrao Shaoxing Jieyang Nantong Hengyang Luoyang Weifang Handan Nanchang Kunming Nanjing Shijiazhuang 8 © The Economist Intelligence Unit Limited 2011 . Incomes and property prices clearly play an important role in determining the size of houses. there is a huge variation in living space per head between cities. Within China. CHAMPS: China’s fastest-growing cities. but so does the weather. cities in the north tend to find themselves on the lower end of the living space spectrum. China’s vision of a “well-off society”. with 18 sq metres. Cities such as Beijing.

Economist Intelligence Unit forecasts. and a lot more will do so within the coming decade (see diagram above). This is primarily because large rural populations in these regions will provide for strong rates of urbanisation. 9 © The Economist Intelligence Unit Limited 2011 . This is contributing to faster job and income growth in the region.109 447 396 389 350 279 272 271 265 234 Figures are for urban areas within referenced prefecture/municipality. 2011-2020 (m sq metres) Chongqing Chengdu Zhengzhou Tianjin Beijing Xi’an Changsha Shanghai Shenzhen Dongguan a b b Existing residential building stock (various years. The table below shows the top ten cities.Building Rome in a day The sustainability of China’s housing boom Forecast net increase in urbana residential building stock. m sq metres) Poland Greece Portugal Sweden Czech Republic Romania Switzerland Hungary Austria Denmark 807 494 424 411 369 366 352 319 318 282 1. Sources: National Bureau of Statistics (China). To illustrate the scale of construction. are facing a period of adjustment that will see exports increasingly take a back seat in driving growth. ranked by the expected net increase in urban residential building stock for the coming decade. a simple comparison shows that the expected increase in each of these cities over the ten-year period is equal to the existing residential floor space stock of a number of European countries. Chongqing. UNECE. already exceeded the target. As manufacturers seek alternatives to the rising costs of labour and land in the Pearl and Yangtze River deltas. but a number of lower-tier. As incomes rise and ownership of cars escalates. Coastal provinces. have been on the receiving end of a series of relocation moves by manufacturers. however. lower-income regions such as Chengdu will grow in prominence. including Wuhan. which in turn should drive increases in home sizes as space becomes less scarce. Chengdu and Xi’an. Moreover. China is entering a period where economic growth in inland regions is overtaking that of coastal regions. a number of inland cities. Chongqing municipality’s unusually large increase partly reflects its large size compared with other prefectures. Regions with high urban populations will still lead construction activity. accessibility will become less of an issue and cities will begin to sprawl. Urbanisation and income growth will act as the main drivers of growth in housing demand.

8% l Urban population growth: CAGR forecast at 2% l Demographics: Falling number of inhabitants per household. long-term outlook. although government is likely to introduce policy with caution 10 © The Economist Intelligence Unit Limited 2011 .Building Rome in a day The sustainability of China’s housing boom What could go wrong? C hina’s relatively large stock of housing per person raises the question of whether building has already gone too fast and will soon plateau. central government finances are relatively healthy and alternative sources of revenue such as state-owned enterprise profits could still be tapped l Current vacancy rates: Emerging gap between housing starts and sales suggest short-term correction may be overdue Risks l Policy: Nationwide roll-out of property tax. albeit more subdued. If residential investment slows in 2011. Only likely if inflation becomes a serious concern l Macroeconomic risk: Property remains the key macroeconomic risk. eliminating real estate as the driver of Chinese growth. so will the Chinese GDP growth rate. 2011-20 Drivers l Urban income growth per head: CAGR forecast at 9. Outlook for housing construction demand in China. increase in single-member households. Our models of underlying demand point to a relatively stable. gender imbalance l Rebuilding: Short building life spans imply high rebuild rates l Rising car ownership will increase available space and restrain price growth l Headroom for increase in mortgage-backed buying l Relatively low population density suggests per head floor space will stabilise at relatively high rates l Monetary tightening: Could trigger short-term housing downturn if administered in a heavy-handed fashion. Risks and the impact of housing on steel and energy China’s property sector is the main driver of the economic cycle. China’s GDP slowdown in 2008-09 was driven not by the global financial crisis but by domestic tightening policies in response to overheated property markets. however.

For example.Building Rome in a day The sustainability of China’s housing boom It is also increasingly important for other global sectors. as new home owners in more affordable satellite towns rely more on cars for commuting. it will also be growing as an export market for the rest of the world. while consumers everywhere will face relatively higher prices. The resulting increase in demand for cars requires further inputs of steel and energy. Our detailed econometric models of China enable us to forecast what a given level of housing activity means for demand for total steel and energy. Over the five years to 2014. steel demand will rise by 22% and energy demand by around 50%. Any attempt to assess the impact of China’s ongoing housing boom on global markets by the use of inputs such as steel and energy in housing construction will result in only a gross underestimation. however—although China will put pressure on global commodity supplies. 11 © The Economist Intelligence Unit Limited 2011 . The main winners will be countries exporting iron ore and oil. as floor space per capita head rises by 25%. housing construction is closely linked to demand for cars. It is important to bear in mind that this is not a zero sum game. housing construction sets off a range of indirect demands for commodities and energy that are important to measure. Chinese demand is crucial for determining global prices of key commodities ranging from iron ore and oil to aluminium and copper. This will have a dramatic impact on global markets. As a broad driver of economic activity.

by how much and when the demand for floor space takes off. Our models for forecasting population and incomes in China’s cities show where. particularly for steel and oil. we do not expect a broad property tax at a rate that would threaten the strong outlook. Continuing urbanisation and steady growth in incomes will underpin strong demand for housing. the housing industry is associated with broad opportunities in construction. China’s ongoing demand for housing has many important implications for business. As such. although trend growth rates are likely to slow. largely in central and north-east China. but this does not point to a structural collapse of housing demand. China’s love affair with housing is driven by cultural factors linked to the gender imbalance. the opportunities are spread over dozens of lesserknown inland cities and will develop rapidly. but it is not short of revenue and could do without setting off tax-inspired political discontent. Within China. The global commodity demand set off by China’s housing industry will continue to underpin commodity prices. China does have a high level of per-head floor space given its income levels. The government’s tightening measures directed at the property market will. at worst. The government is now running trials of a new property tax.Building Rome in a day The sustainability of China’s housing boom Conclusion D espite rapid growth in house prices in China. retail and transport. Hot spots include the rapidly rising cities away from the coast. Businesses that can quickly and objectively weigh up opportunities across the hundreds of cities in China will be ahead of the competition. the real estate market is not a bubble about to collapse. 12 © The Economist Intelligence Unit Limited 2011 . When viewed at the city level. and relatively light taxation of housing as an investment. Neither of these factors is likely to change significantly this decade. lead to a short-lived downturn.

cannot accept any responsibility or liability for reliance by any person on this report or any of the information. Cover image . The Economist Intelligence Unit Ltd.© Hemera/Thinkstock . opinions or conclusions set out in this report.While every effort has been taken to verify the accuracy of this information.

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