Last updated: May 31, 2011 6:50 pm

Fate of China property is global concern

It was not until the Chinese government decided to privatise much of the country’s urban residential housing stock in 1998 that most people in China had even considered the possibility of owning their own home.

While official figures show 89 per cent home ownership in the cities – a figure disputed by many – analysts say Chinese real estate constitutes the single most important sector for the health of the entire global economy today.

“Real estate and housing construction pervade the entire mainland [Chinese] growth model,” says Jonathan Anderson, economist at UBS, the Swiss bank. “They are the most important determinant of commodity demand, a very big marginal driver of China’s external surpluses and indeed a crucial key to real understanding of household balance sheets, saving and investment.”

A visit to any Chinese city, with its forests of cranes and endless construction sites, should be enough to convince most casual observers of the importance of real estate in what is now the world’s second-largest economy.

Whether China’s real estate market is a bubble that could pop, knocking out Chinese growth and shaking the world’s economy, is a question that is being asked by everyone from Brazilian iron ore traders to hedge fund managers in the City of London.

And while there is no consensus among economists and analysts over whether rapid price rises and a big construction boom do constitute a bubble, there is serious concern among some Chinese officials and recognition from almost everybody that the current levels of growth are unsustainable over the long term.

By some estimates, China consumes up to 50 per cent of key global commodities and materials such as cement, iron ore, steel and coal, and Chinese real estate is the main driver of that demand.

For example, construction directly accounts for about 40 per cent of Chinese steel usage.

But when home appliances, property-related in­frastructure and other property-dependent sectors are included, as much as two-thirds of total steel consumption in China is broadly driven by property spending.

Since last year the Chinese government has been trying to rein in soaring real estate prices and limit overinvestment in the middle- and high-end residential developments that have proliferated across the country.

At the same time, Beijing has launched an unprecedented campaign to build tens of millions of state-subsidised apartments to provide housing for the majority of Chinese citizens who can no longer afford to buy or rent their own home in the cities.

This plan is intended to continue the investment and construction boom even as the commercial housing sector slows, but it is also an attempt to address the widening disparities in Chinese society that have partly emerged as a result of such rapid growth.

Indeed, the rise of the Chinese real estate market has been accompanied by a range of unintended side-effects.

Some analysts estimate that actual home ownership in big cities is probably closer to 45 per cent than the official 89 per cent figure, once the huge rural migrant population living in urban areas is taken into account.

Local governments rely heavily on land sales to real estate developers for a huge portion of their revenues and the requisition of land belonging to ordinary citizens is probably the single biggest source of serious social unrest in the country.

While official data are often hard to interpret and recent readings show a mixed picture, the fate of the Chinese real estate market will have an impact on everyone from Australian miners to German exporters to US consumers.

“From a macroeconomic perspective if you don’t understand Chinese property, you probably don’t understand China,” says Mr Anderson.

“And if you follow these commodities and industries [such as metals, cement, iron ore, coal, auto parts, construction equipment, power generation machinery etc], you are well advised to have the right call on the mainland property markets.”

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