Housing Bubbles in the US and China

Paul Krugman has a series of graphs that record the rather dramatic regional rise in US housing prices since 2000. This rise in prices is coupled with a steady drop in the cost of construction since the 1970s and relatively flat interest rates since the 1980s. While I don’t agree with Krugman’s ideas 90% of the time, the data is interesting. I left Florida in 2003 just about the time the prices began to climb there, so this is more or less a phenomenon I’ve been detached from.

One thing we see in the data is that states like California and Florida which, ceteris paribus, have been “winners” in globalization, have also been “losers” in the growth of housing prices, whereas states which have been “losers” in globalization*, like Michigan and Ohio, have experienced more stable growth in housing prices. Add to this a steady uptick in population growth in California (PDF) and Florida and you have a recipe for out of control housing prices.

And here’s where I get to the China angle in my post title: looking at some of the graphs, we could very easily replace California’s housing price trendline with the Shenzhen Special Economic Zone while plotting mid-tier regions like Tianjin against the Florida trendline and low-growth provinces against the Midwestern states. We find other similarities in the two markets as well. The housing price spike also started in China around late 2003, though unlike the US market, it shows no signs of slowing down. (Not surprisingly, my Chinese associates often talk about early 2003 as if it were a bygone era in real estate.) Chinese housing prices, likewise, cannot be explained by the cost of construction, since many raw materials have been subsidized while workers’ wages remain flat (and in the case of some unscrupulous contractors, nonexistent). Similarly, regions which have experienced dramatic population increases have also seen concomitant growth in housing prices, especially in regions like Shenzhen, where population grew 15% year on year in the 1990s and early 2000s.

There are a few differences between the US and Chinese housing markets, the most notable being that Chinese investors flood the housing market with cash because there are few other stable investments available. The Chinese currently lack the kind of financial services necessary to make sound stock and futures investments, so they turn to housing, which is seen as concrete and dependable. Things may change slightly in the future as the Chinese government liberalizes rules on investing in overseas stock markets, starting with a pilot program in the Binhai region of Tianjin.

While, as Krugman notes, the big danger in the American market is the spike in defaults caused by higher mortgage rates in the near future, not to mention unemployment from loss of construction jobs after the bubble, the danger in China is that the prices of new houses have radically outstripped the income of common people. Shenzhen, again, offers proof of this point:

The housing price in Shenzhen, the first special economic zone in China, has seen continual growth since the end of 2005. The average price of housing in the downtown area is 15,000-20,000 yuan (US$1,980-2,630) per square meter while that of luxury housing is 35,000-45,000 yuan (US$4,610-5,920) per square meter.

On the other hand, the average price in neighboring Hong Kong is 20,000-30,000 yuan (US$ 2,630-3,950), almost double than that in Shenzhen. Additionally, Hong Kong residents’ GDP per capita was US$38,127 in 2006 while that in Shenzhen was only US$8,619.

All this, and the bubble hasn’t burst. Yet, barring a dramatic shift in policy that leads to rising wages, alternative investment opportunities for all of China’s new rich, and more modest housing price growth, the contradiction between Chinese incomes and the cost of living ensures that the Chinese market is bound to follow America’s lead. In the words of another blogger writing on the subject, the Chinese and American housing markets are a painful illustration that not all growth is a good thing.

* The industrial Midwest remains a “loser” in globalization insomuch as, unlike California, it hasn’t created new jobs to replace jobs lost to trade, resulting in long-term higher employment rates.