China's housing market rebound: A tale of two (types of) cities

China's housing market rebound is highly mixed. The more developed coastal regions and tier 1 & 2 cities are in the midst of a rebounding property market.  Regions in the hinterlands and the lower tier cities are still in the negative.  Much of this has to do with the amount of pent-up inventory across the different regions.  

China's hinterlands have seen the bulk of the country's housing overcapacity and "ghost town" construction as local leaders and developers unleashed massive projects in anticipation of never-ending boom times.  As boom times have ended for many hinterland economies - mining regions in particular - less developed cities and provinces have been left with a mountain of unused housing property.  According to the most recent IMF Article IV report this year (see the chart to the right), China's residential real estate inventory surplus is primarily a problem of overbuilding in the lower tier and less developed regions of the country.  Inventory in the more developed cities and regions - those with the largest contribution to growth - is much tighter.

The bifurcated housing market rebound has two potential implications going forward: First, the tight supply and price increases in the big provincial economies on the coast and top tier cities (see the chart on the top right) will be a boost to short-term growth. A construction and real estate rebound in those large drivers of growth (see provincial map below right) will result in a positive contribution to overall economic activity in the short-term.

Second, property development has been a major driver of economic activity and income growth in the hinterlands.  The lower tier cities and less developed regions have already taken a hit from the slowing of mining and industrial activity. If heavy industry, mining, investment, and lastly the real estate market are faltering, what are the prospects for hinterland and low tier city economic restructuring?  Less developed regions with plenty of heavy industry and mining activity, Shanxi and Heilongjiang in the North for example (2.7% and 5.1% GDP growth on the year respectively), have seen faltering growth this year.  More developed regions like Tianjin and Chongqing are still experiencing relatively rapid growth.

Without the same rapid income growth - partly funded by rapid real estate development - that helped service and consumption develop in the wealthy regions, will less developed China have the same capacity for economic restructuring?  If developers and governments in the hinterlands are unwilling and unable to fund more housing overbuilding, then real estate - an important growth engine - will be flat.

Property prices in the more developed cities are rebounding dramatically


Overbuilding of unused property is a well-documented problem in China.  The problem is difficult to measure due to China's opaque housing figures.  Potentially countrywide 1 out of 5 housing units remains empty.  

How the problem will be resolved is difficult to forecast as well.  China's household registration reform and rapid urbanization will eventually fill the demand.  Beijing wants to urbanize 100 million rural Chinese by 2020 alone.  That will require the equivalent of at least 24 Bostons or 37 Chicagos.  The inventory surplus and "ghost town" phenomenon has been exacerbated by the location of development megaprojects.  Massive residential districts have been built in the undeveloped and low tier regions, without enough infrastructure or industries to support them.  Perhaps the urbanization infrastructure push will help fill them some day. But for now, the overbuilding has left the lower tier regions out of the housing market rebound and will certainly have implications for income growth and restructuring prospects.

For the short-term, the tighter inventory and price increases in the more developed regions - the largest engines of growth - should help modestly boost broad activity.  But the massive inventory and declining prices in the hinterlands will have consequences for income growth and therefore restructuring to consumption and services.  The hinterlands may be much slower following their wealthy counterparts into service and consumption rebalancing.