Housing Market in China

People including Hong Kong tycoon Mr. Li Shau Kee who turned $HK50 billion to $HK200 billion believes that in the long run properties market in China has a huge potential. One reason is China is still undergoing the process of rural to urban population migration. That is people leave small villages in China and go to big Chinese cities to look for jobs and then start their own businesses. These people will need housings. The statistic is there are 12billion people in the whole China and only 4billion are in big cities like Shenzhen and Shanghai. It is estimate 0.1billion people migrate to cities each year. So there is a lot more to go. I can confirm this trend because my wife is born in rural china and so is her whole family and now they are in the big cities. However the problem is average salary in big cities are less than 2000 Yuan. Blue collar which is the middle class who sits in he office makes less then 3000 Yuan in average and right now that is less than 5% of the population. The house price is very high. A typical house in a small city cost 300,000 Yuan and in big city cost 50,000 Yuan. So right now, not even the blue collar can afford to buy house. The only people who can are right business people. The rich people in China are very rich and so the poverty gap is huge in China.

So what does this mean? Should we buy Chinese property stocks or not? In the long run yes but in the short run, I think there is an over supply and property price is too high and stock P/E is still high despite market correction. Let's look at the below photos taken in Nanning in Guangxi. As far as the eye can sees on both sides of the road, these are new building waiting to be sold.

So really there are too many new properties and I do not think there is that much real buyers. Yes the house price rose enormously since 2005 but a lot of these are due to local and foreign speculators who bought big chunk of properties to push up price. The price is too high for any ordinary users to purchase. So I think property price is too high and the stock price of these property stocks is too high with average P/E over 45. But in the long run China is still very underdeveloped. The below is A photo of the current Nanning City, note very flat and not much high rise building. Photo B is Wal-mart in Nanning. Now just image the whole city starts to look like photo B and imagine the property price then.

Photo A


Photo B

Too hard to imagine? Not me because I witness this kind of change in Shenzhen. In 2004, the train station and it s nearby roads are dusty and dirty and now it is beautiful. It just took 2-3 years. So in the long run, these properties and companies who make these properties will worth even more. Especially when the Yuan is appreciating 8% per annum.