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China Land Price Index Q4/2014 Update

Joseph Gyourko, Director, Zell/Lurie Real Estate Center
February 26, 2015

The Martin Bucksbaum Professor of Real Estate, Finance and Business Economics & Public Policy, Nancy A. Nasher and David J. Haemisegger, Director of the Zell/Lurie Real Estate Center, Joe Gyourko reports on the latest trends in land price growth in 35 Chinese cities


Executive Summary

The 35 Chinese cities studied by Wharton Real Estate Professor Joe Gyourko, and his colleagues at the National University of Singapore and Tsinghua University are showing substantial variation in real residential land price indices, according to their fourth quarter update. Results for calendar year 2014 span a wide gulf, from five declining markets (Chongqing, Nanjing, Dalian, Changsha and Xian), to Beijing, which showed a 54 percent increase in real land prices for the year. Overall, the index was up 11 percent in real terms, and over the 11 years of the study, aggregate land prices rose at a compound 15.2 percent annually. Although prices rebounded in the fourth quarter, quantities did not. The data for 2014 is 44 percent below the same quarter of 2013 and 60 percent below 2012. Massive migration to Beijing, the capital, has not been matched by over-building, which keeps demand and growth high. In some interior markets outside of the East region of the country, building rates have been high and supply has outpaced demand. Professor Gyourko warns a more dramatic fall in values is possible if fundamentals weaken in markets that have been over-supplied. As construction activity slows, so slows the national economy. In general, cities in the East region--Beijing, Shanghai, Guangzhou--are up 10 percent for the year. The West region shows a 12 percent overall decline for the year and the Middle region is in between the two. Unique to China, and perhaps the world, is Beijing, which has a 27.5 percent compound annual real appreciation rate over the past eleven years. Over the life of the study, real land prices in that city are up 1,036 percent. Gyourko believes basic supply and demand fundamentals are at work in the property markets and says an economic slowdown is natural, as China adjusts its economy from one that is largely export driven to one driven more by internal consumption. And although it's easy to compare the heterogeneity in China's markets to that in the United States, he does not foresee a similar financial collapse occurring there. Wharton real estate professor Joe Gyourko follows the Chinese land markets and has created a land price index for major Chinese cities in collaboration with the National University of Singapore and Tsinghua University. A description of the index and the underlying data are available on his website.


Interviewer: Joe, you have been working for some time on residential land price indices in China, along with Tsinghua University and the National University of Singapore. You have an update. So, what does the most recent update of your land price index show? Joe Gyourko: The most recent update is for the fourth quarter of 2014. So, we're actually able to produce three new sets of results. One is for the 35-city aggregate index. The index itself is described on my website and Tsinghua's and the National University of Singapore's. What that shows is a recovery in Chinese land markets for these 35 major cities. The fourth quarter index was up 11 percent in real terms, that's Constant Yuan. That more than reversed a seven percent—six to seven percent—drop the previous quarter. For calendar year '14, aggregate land prices in those major cities were up just over 7 percent. And over the 11 years for which we have data, they're rising at a compound 15.2 percent annual rate. So there's been a lot of real land price growth in China. The second point that I'd like to emphasize, though, is that while prices rebounded, quantities did not. They are way down. In other words, the number of land parcel sales from these 35 city governments to private developers in China remains very low. The fourth quarter data for 2014 was 44 percent below the same quarter in 2013. And it's 60 percent below two years ago. So, what we see is a stark drop in quantities. And that's something we might want to discuss later because at least when we look at other countries' housing and land markets, changes in quantities lead changes in prices. The other nice thing about an end-of-the-year update is we have sub-indexes for regions that we report every six months and from 12 major cities that we report once a year in the fourth quarter. So, in the regional data, we're starting to see some variation across regions. The east region, which contains Beijing, Shanghai, Guangzhou—the east coast markets—are doing very, very well. They're up 4 percent in the second half of the year, 6 percent in the first. So, they're going strong. The west region countries—and in China the three major regions are east, west and middle—the west is down 3 percent in the second half. It was down 12 percent overall for the year. So, you're starting to see some markets well off the coast in China start to deteriorate in price terms. And the middle region is in between those two. Now, I think the most interesting results are for the 12 cities. We only report them once a year because only over a 12-month period do we have enough land price sales to estimate our index in what we think is a credible way. Beijing, as usual, I think is the most amazing city I study anywhere in the world. Land prices—real—in Beijing were up 54 percent in 2014. And by the way, they were up 47 percent in 2013. And over the 11 years of our data they're up 1,036 percent. That works out to a 27.5 percent compound annual real appreciation rate inland. That's Beijing. There's nothing like it in China or, as far as I can tell, anywhere else in the world. Although other east coast markets—Shanghai, Guangzhou—are up. Shanghai's had two very strong years also in 2013 and 2014. They have a 20.4 percent compound growth rate over their life in the index. Those markets aside, there are four markets that show decline—Chunjing, Nanjing, Dalian and Changsha were all down in 2014. Dalian is down for the second year and they're 25 percent off their peak. So, again, that's the sign that you're seeing real variation and heterogeneity across markets. And in that sense, China looks a lot like the United States, where it's really a mistake to focus too much on the aggregate national index because they have different markets that have very different fundamentals and follow very different patterns. The rest of the cities—the others in our 12—were pretty much flat. It was only the big east coast markets that were really appreciating at a continuingly high rate. So, that's the update from the fourth quarter.
The Driving Factors
Interviewer: I'd like to turn to some of the factors that are driving the results that you're getting. But maybe it's best to start with the markets that are doing well in China—the housing markets that are improving. What factors do you think are causing that? Joe Gyourko: I think it's good old-fashioned supply and demand. So, when you look at Beijing, there is tremendous demand to enter the city, to live there. It's the nation's capital. Many businesses want to be there. Many households want to be there. And in other research that I've looked at with my co-authors on this index, when we count up how much supply has been created, it is less than we think the population growth is in those cities. So, I think one of the reasons you're seeing strong trend growth in the east is you see massive immigration, not just from other Chinese cities but from the rural parts of China. And you do not see over-building in those markets. In the markets that are starting to decline, particularly in the west, some in the central region, what you're seeing is strong growth. There is a massive movement of rural households into cities throughout China. But in some of the non-coastal markets, the building rates have been so strong that supply has outpaced demand. So, that's one factor—which is, it's just good old-fashioned supply and demand fundamentals. The second one, is that China's growth is slowing. This is an aggregate factor that again plays down a little differently in Beijing from say, Dalian or Chunjing. But the local market fundamentals are just weaker in some places than they are in others. And if the fundamentals weaken in a place that is over-supplied, those are the places you worry that you're going to see a more dramatic fall.
Short-term Expectations
Interviewer: So, what can we expect to see over the next few quarters? Joe Gyourko: I think you're going to see more of the same in a broad sense, which is, I think, you'll see some markets continuing to do quite well and I think others will deteriorate. And I think more are likely to deteriorate if China's aggregate growth slows. And partly that's for the real estate reasons I talked about—supply and demand. But also, remember construction activity in China is a big part of their GDP. They don't break out residential from commercial. But if you include all real estate activities, it's well over 10 percent of GDP. So, if that slows, the Chinese national economy slows. And if the Chinese national economy slows, there are few jobs, which means there are fewer reasons for people to move into these urban areas. So, you can see a self-reinforcing cycle out of this. And I think supply and demand in the property markets is at work and slowing growth as China adjusts its own broad economy from largely export driven to more internal consumption driven. It just slows in that process.
Any other challenges?
Interviewer: So even with slowing growth, do you see anything derailing the Beijing train? Joe Gyourko: I honestly don't know. What I can tell you is I'm of two minds about this. Nothing can grow at 27.5 percent per year for all that long. And that's what the Beijing land market has been appreciating at. So, that can't last. But do I see a collapse? No. Simply because demand is incredibly strong and supply has not been incredibly high. Even with all the building, it's been much less than demand. So, it will end. If you think China's growing at 7.5, Beijing's appreciating at roughly four times the growth rate of national output. That can't continue. But that's a very different statement from, it will crash. Where I worry about problems, which I think is what you're asking about, is in the non-coastal markets, a handful of them, where you see excess supply. If you see a negative demand shock in those markets amidst excess supply, then you could have more serious problems.
How does land become available in China?
Interviewer: In China, how does land get on the market? Joe Gyourko: Land is owned in urban areas by the local Communist Party government. So, if a private developer wants to build a high rise and sell those units to Chinese citizens, they have to buy the land from the local government. And what they really do is purchase a leasehold estate for residential use that can be for up to 70 years. And our land price index is really an index of the leasehold estate purchase prices. And for those who really want to dig into those details, we have a technical white paper on my website where the index data also is located, and you can read everything you want to know about exactly what that means.
The Government Controls the Supply
Interviewer: So, when you say that there's a decline in quantities—there's less supply coming on the market. That is less supply being released by the government then? Joe Gyourko: They sold many fewer parcels this past year than they did in the previous two, which means there must be less supply coming down the road because you need the land to build the high rises.

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