China's real estate bubble? Three reasons it's not.
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:
1. 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.