We don’t need to cite sources to illustrate the widespread fear that China is in the grip of a housing bubble and that the collapse of that bubble will lead to widespread fall in metal demand and equity markets to name just two areas dependent on its continued strength – examples are in the press every day. Nor do we need to cite sources that suggest the opposite, that Beijing is managing a soft landing in the construction industry and that all is well with continued robust Chinese growth. Indeed we have written from both perspectives in these columns over recent months.
The point I would like to make here is that short term spikes excepted it doesn’t really matter if China is experiencing a housing bubble or not, the fact remains medium to longer term housing demand in China will continue to inexorably consume metals and hence drive prices upwards. Indeed an adjustment to house prices in the form of a price fall would aid the process, as it would make more houses affordable for more people. The greatest risk to metals demand and the most likely risk to slowing metal consumption by the Chinese construction industry could in fact be a steady increase in the market along the same trend as the last twelve months. A recent Standard Bank note to investors points out that in May 2010, the average house price in 70 cities in China rose 12.4% year over year, slightly less than April’s 12.8% rise. New house prices increased at 15.1% y/y while existing house prices were up 9.2% y/y in May. At the same time the note argues while income growth in China (average of 15% p.a.) has exceeded the rise in house prices, income growth is skewed towards higher income earners (similar to many other parts of the world). Turning to empirical evidence the note explains the Gini-coefficient, which measures income inequality and advises China is at 0.47. A Gini-coefficient of 0 implies complete income equality, while a coefficient of 1 implies complete inequality. To put China’s income distribution in perspective: most European countries have a Gini-coefficient of less than 0.30, which implies a fairly equal income distribution. The US has a coefficient of .45, while Brazil has one of the most skewed income distributions with a coefficient of 0.57. With income growing so fast in China and with a comparatively skewed distribution pattern the haves are going to outnumber the have nots and the gap is going to widen. Property prices are already outstripping the reach of many low to medium income buyers and yet demand is not letting up nor is it likely to for many years to come.
Due to the one child policy, China’s population is aging and population growth is low. In a China Daily article Li Bin, director of the National Population and Family Planning Commission, said the population on the mainland will reach 1.39 billion by the end of 2015, among which as many as 700 million people will be living in urban areas. In 2009, 606.67 million of the country’s 1.32 billion population were urban dwellers, while the remaining 721.35 million were rural inhabitants. Over the next five years this is expected to reverse driving demand for housing to meet the needs of 100 million people. It is this inexorable migration of rural dwellers to urban that is and will continue to drive housing demand, rather than a growing population as in countries like Brazil and large parts of the Middle East. In such a centrally planned economy, the authorities will not allow these people to go homeless. If property prices cannot be made to fall to achieve affordability watch the government invest billions in low cost housing the alternative as they are only too well aware will be social unrest. For metals consumption the result will be the same, low cost or luxury housing metals are still required.
So the most likely impact, should the Chinese property market experience sudden price collapse, will be a drop in domestic consumption among the high earners already on the property ladder, but not a collapse of the construction industry itself. After a short term blip on going demand from new urban dwellers will see to that for many years to come.