Are the worries about a housing bubble in China warranted?
I should start by saying there certainly are ample worries about Chinese housing and plenty of talk of Ghost Cities and other issues that present themselves. We care about this because China is the world's most important economy, it generates a third of global growth, and our calculations suggest the Chinese housing market is almost a fifth of the Chinese economy. So, it's certainly a subject that merits closer investigation, which is what we've done.
What is the near-term outlook for Chinese housing?
When we look at the near-term outlook for Chinese housing, we actually find it to be surprisingly benign. We can say that in two different ways. One is just by looking at land sales and housing starts and completions and essentially the chain of activity that looks broadly in line with what it should be right now: no signs of trouble. When we calculate how many houses China is building – it's building just under seven million a year. When we calculate how many China needs on a flow basis, it actually needs a little more than that, so we're not getting any particular signs of concern, at least from the near term side of things.
Is the country building too many homes?
I think the short answer to this question is, "Perhaps." The long answer is, "Maybe not," just to confuse things. The reason I say that is because there is no denying that China has a very high housing vacancy rate right now: 29% of Chinese homes are empty. That is a big concern. It's probably the big concern when you look at the Chinese housing market. There isan offset, though, and the offset is we also know that there are far more Chinese households than there are Chinese homes. A lot of households are crammed multiple to a home and, as countries get richer, that normally goes away. When you crunch those two situations simultaneously, you can still argue China needs more housing over time, but you've got this dwelling risk, this vacancy rate risk that exists in the medium term along the way. So we are still somewhat concerned, but there are some tempering factors.
Where does Chinese housing affordability now stand?
Chinese housing affordability really is a mixed picture. The exciting numbers that you hear and that gets cited in the Economist Magazine tends to focus on the fact that in the biggest cities it can take 15 or even 25 years' worth of income to buy a house, which is quite absurd. The reality seems to be that, if you include the non-luxury properties and the smaller cities, as well, and you really just say, 'What share of the average Chinese households' spending is going towards dwellings?" it's actually smaller than the average American's share of dwelling consumption – and it's actually been coming down. So we walk away not feeling great about affordability in China, but it's not as bad as it looks from what we can tell.
How concerned are you about the risks inherent in China’s housing market?
I think in the end, we walk away concerned to an extent in the sense that there are overly high vacancy rates, there are some signs of excess in various pockets of the housing market, but ultimately a little bit less concerned than we thought we'd be. We probably downgraded that risk a little bit in our own assessment. Still lots of things to worry about in the world, plenty to worry about in the Chinese context, as well, but housing isn't quite as problematic as we had thought.