China might not be headed for a real estate bubble

Benjamin WardThe Christian Science Monitor

Many analysts and market watchers, whose job it is to warn of impending real estate bubbles, have trained their sights on China. It's easy to see why. The economy has expanded an average 10 percent a year for the past 30 years, an incredible growth rate. Average housing prices tripled between 2005 to 2009 alone. But here are three reasons Chinese real estate has more room to run on the upside before the good times end:

#3 Exploding demand

The term ―real estate bubble – describes a phenomenon where property quickly increases in value compared with other economic indicators, such as income and demand. In China, however, average salaries have, for the most part, kept pace with property values. As for demand, that’s where it gets interesting.

Few people realize how absurdly big China’s 1.3 billion population really is. That funny 0.3 billion tacked on at the end, which looks like a rounding error, actually equals the total population of the United States. In 2010, there were nine US cities with populations over 1 million people; in China, there were 160.

As an expatriate American who has visited 40 Chinese cities, I am invariably greeted at the exit of every airport with the smell of bus exhaust, the gritty feel of construction dust, and the sight of an endless enveloping wave of humanity bumping and surging past me. With more than 60 years of pent-up demand, the Chinese are playing an epic game of economic catch-up at a pace never before seen in history.

It's not just population that's boosting demand for real estate. It's Beijing policy. As China grows and its resources are stretched, the government understands that people in dense cities consume less and generate more wealth than their rural counterparts. People in cities are also easier to keep tabs on, which suits a government that likes to keep a close eye on its populace. Not long ago, China mandated that over the next 20 years 20 million people a year would be urbanized – encouraged to leave their hometowns to join a modern way of life in the big cities. To house these new citizens, the government must build the equivalent of one Canada per year to keep up with this demand.

#2 Not just a housing boom

The current development explosion in China is more than just a housing boom. We’re seeing increased investment in mixed-use communities as a way of future-proofing investments. For example, if demand for office space falls, investment in residential and retail could help shore up lost revenue on the office side.

Another way developers are hedging against downturns is by developing areas near transportation hubs. The Chinese government’s commitment to transportation is staggering. Already China has more high-speed rail than any other country. The July 23 crash of a high-speed train that killed 39 people has brought new scrutiny to that rapid expansion, but Beijing is still pledging $300 billion by 2020 to double the capacity of its high-speed network. Match that with a push for new airports, highways, and urban rapid transit, and a revolution in modern transport becomes clear. Since moving to Shanghai at the end of 2006, I’ve seen the addition of two airport terminals, three high-speed rail lines to Beijing, Nanjing, and Hangzhou, and eight new subway lines. Savvy developers in these cities are looking to build around those transportation hubs, seeing vast opportunity in the long term.

#1 Risk-averse culture and policies

Fiscally, the Chinese are quite conservative. The average household savings rate is around 37 percent –compared with 0.4 percent in the US in 2007, right before the downturn. It's rare for individuals or companies to be highly leveraged. There is also a certain stigma attached to new married couples that don’t own a house, which also helps to keep housing demand relatively constant. Even in downturns, people will still marry and be drawn to home ownership.

Beijing also uses a number of ways to keep the economy running like a finely tuned machine. The government uses all economic instruments at its disposal to coax markets in the right direction, including direct control of banks and their ability to lend. Last year, China increased the minimum amount for a down payment on residential real estate from 20 to 30 percent. Foreigners in China are only allowed to buy one property and are required to place 50 percent down. Central control allows the government to react swiftly to shifts in the economy in an effort to avoid surprises down the road.

Until a few months ago, there had never been a property tax in China. In hot markets such as Shanghai and Chongqing, governments are proposing a new 1.4 percent property tax to generate revenue while slowing growth to more manageable levels. The establishment of real estate investment trusts in 2010 is another way to help cool off any worries of a bubble. These instruments make it possible for Chinese and foreigners alike to invest in real estate without actually buying property on speculation.

Population alone cannot sustain meaningful growth. One only needs to look at China’s erratic southern neighbor India to see the argument break down. But as long as Beijing’s strong centralized policies continue to usher hundreds of millions of its citizens into the middle class, demand should remain high and the bubble will fail to materialize.

Benjamin Ward, regional design director for global architecture and design firm Gensler, worked in New York, Paris, and San Francisco before moving to Shanghai in 2006.