U.S. Global Investors thinks Chinese property bubble fears are well overblown due to a lack of long-term historical perspective. It’s not just about where prices have come from in the last few years, but where they came from 20 years ago.
Thus while price rises may have seemed enormous recently, when put into long-term context, relative to China’s massive GDP growth over the last two decades, then the rise in property prices since 2005 doesn’t look too wild. The rise in prices has been far less than that of GDP since the late 1980’s:
Prior to the early 1990s, urban dwellers in China were provided an apartment by their employers or the government, with rent set at less than 5 per cent of their salary (utilities included). Starting in the early 1990s, the government began to privatize housing by selling apartments to their residents at a low price. Almost overnight it created a private home ownership rate of about 70 per cent.
This policy change was also a vast redistribution of wealth from the government to the people – those apartments typically occupied prime downtown locations, and thus are worth at least the price of a new luxury apartment.
The price of housing has roughly doubled since the late 1990s, but it’s important to remember that China’s prices have risen from a much lower base than in the developed countries (among them, Britain, Ireland and Spain) in which bubbles were created.
While admitting that property prices may have gone up too fast in signature cities such as Beijing and Shanghai, even these markets have seen their oversupply levels come down thanks to government initiatives to cool them.
Thus the message here is that China as a whole remains reasonable relative to the growth of the nation’s economy and accompanying growth of Chinese spending power. In short, if your people’s spending power doubles, then so can property prices.
It would be interesting to see the China property bears’ counter to the first chart above.
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