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Don’t be afraid of what the media says about China’s real estate

Xun Yao Chen

Are dry bulk shippers braving favorable economic waters? (Part 6 of 8)

(Continued from Part 5)

Demand generally leads supply

If there’s no supply, there’s no demand. Steve Jobs even said, “People don’t know what they want until you show them.” But unless you’re starting something new, marginal supply generally depends on marginal demand. In history, a city grows because of population increases—rather than the other way around. The same can be said for China’s real estate market. If the demand isn’t there, there’s no supply.

Real estate sales

Most hard data is shown on a year-over-year basis because the market often rises and falls based on whether growth is accelerating or decelerating. But know that not all slow-downs and picking up in growth translate to full-blown bear or bull markets like in 2010. For the month of November, we estimate (using the National Bureau of Statistics’ data) that the price per square foot of buildings sold rose 5.6% year-over-year. This seems low, but price increases were higher—towards 12% year-over-year—in early 2013, prompting the government to sound the alarm. Sales of building floor space have been falling due to higher activity during the second half of 2012. Besides, the price change appears to show some stabilization.

Ignore media headlines

When the media talks about China’s ever-rising real estate market, investors have to put the reports into context. First, China’s inflation rate is rising by about 3.5%. Second, wages are growing faster than they are in developed countries. Third, prices of newly constructed buildings rise more than secondary buildings because people prefer newer homes, which could also be driven by quality improvements. Sales of buildings constructed are also skewed by higher-end properties.

If you go to China, you’ll notice that many buildings are poorly made. Even houses that were built five years ago show cracks and look like they were made 20 years ago. The National Bureau of Statistics’ wage growth is skewed towards those who have jobs and earn a living. Those who work near minimum wage or are migrants to urban cities are sometimes paid under the table, so they’re not captured in the data. I’m also no real estate expert on China, but the chart above does follow China’s economic cycle pretty well. We use what we know and what seems to work—until it doesn’t.

Investment tip: Never fear

We can’t ignore China’s poor allocation of spending on infrastructure to keep the labor market moving—like spending money to build a road, only to destroy it and build a nicer one on top. We also can’t ignore how the data doesn’t capture the entire picture. But trends in the skewed sample might be a good reflection of China’s economic growth. If real estate sales show stabilization over the next few months, the weakness we saw in the real estate climate index (see the previous article in this series) could be driven by industry-related, rather than macro, factors.

How about investing in real estate? Read the next article in this series to find out.

Continue to Part 7

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