The affordability of China's residential real estate market and opportunities for property developers

Abstract

China has the largest housing market in the world and the property market continues to advance at an astonishing pace. In 2009, 22.2% of China's RMB 19.3 trillion fixed asset investment and 17.9% of foreign direct investment were invested into the real estate sector. At the same time, the highly dynamic market structure and huge regional disparities in China created mixed interpretation and confusion. Nationwide statistics blending urban and suburban prices and the indifferent treatment towards subsidized housing and private housing overshadowed the actual development on the local level. With unprecedented investment pouring into the Chinese real estate market and sky rocketing property prices in most major cities, the legendary short-seller James Chanos described the Chinese real estate sector as "Dubai times 1,000 - or worse". Yet, another American financial guru Jim Rogers openly debunked the statement from James Chanos and remained his bullish views on China. This thesis is divided into two sections. First it reviews the historical development from the Chinese property market. The paper explores the current situation of the market and focuses on the affordability comparison between the national level and the local levels. On a national level, housing prices grow at a pace similar to China's GDP growth supported by an even faster growth in income levels. Affordability ratios are in line with international standards and below the levels experienced by Japan and US during their bubble era. At the local level, different cities experienced drastic differences in price growth and supply surpluses. In some cities, even the suburban areas are beyond the affordability of an average household. In the second section, this paper explores the development of affordable housing, the new frontier of Chinese real estate market. The emergence of the affordable housing market together with new housing policies has different implications and opportunities to the incumbent property developers as well as potential low-end disruptors in China. This paper concludes with recommendations on some of the available investment options for a bearish investor in the Chinese real estate market.