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China’s Ghost Cities

There has been much mention in economic news of a potential housing bubble in the Chinese economy and ultimately a hard landing. This for China would be a GDP figure of around 6%. The worry is that sales of new residential buildings, measured by floor space sold in the chart, have fallen significantly over the last several months, although it may not be going into free fall with March delivering some improvement. Rodney Dickens of Rodney’s Ravings talks about the sheer scale of the numbers is staggering (e.g. at the peak over 150,000,000 sqm of floor area started per month). The charts show how much higher the floor area of building started has been relative to the floor area sold since 2009. On average since January 2009 11,470,000 sqm has started construction each month while 8,569,000 sqm has sold per month. We assume these data are on a comparable basis. This means starts have been running 34% ahead of sales each month on average for over three years, which fits with there being reported to be something like 64m vacant new apartments.

According to Patrick Chovanec (Associate Professor of Practice at Tsinghua University’s School of Economics and Management in Beijing) China’s developers are playing out a kind of prisoner’s dilemma:  rush to complete, in hopes of cashing out.  But while supply keeps going up, demand is going down.  In late March 2012, a central bank (PBOC) survey reported that only 14.1% of Chinese consumers were looking to buy a house in Q2, the lowest level since 1999.  Only 17.7% expected home prices to rise in Q2, and 62.9% said they still consider prices to be too high.  So all those rushed completions only add to the glut already on the market, driving prices down further and giving buyers — investors and aspiring residents alike — all the more reason to hold off for a better deal.

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