2014-05-16

Low Fertility, Low Household Formation and High Real Estate Prices

Triple Whammy Hitting Property Market, Investment Banker Says
But Ha says such measures will have a limited effect for a range of reasons, and the first had to do with an aging population. In the 1950s and 1960s, the country's fertility rate was as high as 3 percent, then it started to fall in the late 1970s as the one-child policy went into effect.

Ha said that as the segment of the population born in the 1950s and 1960s retires and the fertility rate declines, demand for housing will fall.

Also, high prices for homes mean most people are having difficulty making a purchase, Ha said. He estimated that in many large and medium-sized cities, average monthly payments on mortgages accounted for up to 78 percent of household income last year, up from 62 percent in 2010.

"Such a high rate is unacceptable for most normal families," Ha said, adding that a more reasonable level was 50 percent.

Finally, the total area of the country's commercial properties under construction was 4.9 billion square meters at the end of last year, Ha said, and this was four times what was needed. And this oversupply will only worsen as population growth slows, he said.

As for suggestions that rapid urbanization will aid the property market, Ha said many migrant workers cannot afford home prices in big cities. "Urbanization can't save China's property market."

In 2011, I posted Labor costs soar in China, with the following image to show why wage pressure was already building.

Fast forward 4 years, and that 20-24 year old bulge is now 24 to 28, heading into the family formation sweet spot.

Aside from pure demographic factors, China also has to content with urbanization which lowers fertility and delays marriage and household formation. The other issue is that Chinese are more likely to have three generations under one roof. In this post, I had this quote from an article:
I came across quite a few such families in Beijing. Among my neighbours were retirees who lived with their son and took care of their grandson. The elderly couple had sold their home in Shenyang to help make the down payment.
This isn't a widespread trend, but it shows the natural limit on housing prices. When apartments are super cheap, people in the city might buy a second home for their parents. Young professionals will buy a home before they get married. When prices soar, parents sell their home and move in with their children. Young adults live at home with their parents or live in cramped apartments. China is seeing two unnatural trends: the population in the target home buying market is falling, but prices are rising. This can exist in a popular area such as San Francisco, New York, London, Beijing or Shanghai, but it cannot persist everywhere because increased demand for housing in City A results in reduced demand to live in city B. Something is going to give and it isn't going to be a rapid increase in the population of 18 to 26 year olds.

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