What “oversupply” actually means for China’s real estate9 October, 2012, 13:01. Posted by Zarathustra
This is part 2 of 3 in the series Is the Chinese real estate market recovering? For real?
We have already said that we believe this rebound will not be a sustainable recovery for the market.
In the short-term, although prices are holding up, the positive momentum since the summer is losing steam, as we noted.
The table below from Credit Suisse shows the sluggish sales during the Golden Week. Although transaction volume year-to-date is higher this year than last year, this Golden Week sees about 28% yoy decline in primary market sales in major cities, and 71% decline compared with the previous week.
Source: Credit Suisse
Perhaps a more fundamental reason for disagreeing the analysis by Standard Chartered is their view on supply and inventory. It is a very common to see analysis on the real estate which refers “supply” to the flow of newly constructed homes. If the real estate is like other products such as food, then it is fine to think of “supply” as the newly constructed homes which are being sold in a given period, and the StanChart’s inventory period analysis is relevant.
However, real estate is not food. Real estate does not disappear after being sold from a developer to a new homeowner, unlike food, which is usually eaten after being sold. Instead of just looking at the “flow”, we also need to look at the “stock”. We all know that many Chinese cities have this phenomenon that real estate investors and speculators purchasing more than one apartment, and leaving most of these apartment empty. This phenomenon appears everywhere. For some places like the famous ghost city of Ordos, empty houses are everywhere of course. For top tier cities, you are quite probably able to find a lot of empty apartments as long as you know where to look for them.
Ultimately, we imagine most of the owners of these apartments would like sell and cash in at some point, otherwise there is no point in purchasing more flats than one actually needs. In other words, we believe that some of these massive yet unknown number of flats and houses will be on the market sooner or later. What we do not know is when these part of the housing stock will be out on the market. As Jinsong Du of Credit Suisse pointed out late last year (emphasis ours):
Many popular supply/demand models implicitly assume homebuyers will never sell vacant units. Ministry of Housing data indicates that developers’ existing land banks can produce almost 100 mn new housing units. Our calculation shows that some potential resale of vacant units plus developers’ existing land banks should already be enough to satisfy 10 to 20 years’ housing demand.
Once one considers the fact that owners of these vacant homes will one day put their apartments onto the market, the level of inventory currently held and being developed by real estate developers is made much less relevant. Property developers may be destocking now, and they may feel tempted to go and get land and build more after destocking. However, the apparently “normal” inventory of new homes means nothing as far the the total housing stock is concerned. In other words, the analysis by Standard Chartered, which based only on the current level of inventory and the average pace of sales of new homes is completely flawed.
- Is the Chinese real estate market recovering? For real?
- What “oversupply” actually means for China’s real estate
- The unsustainable rise of China’s property prices