I keep seeing people talking about how China is building way too many houses. Maybe they are, but I’m having trouble following the logic. Free Exchange links to a Barry Eichengreen column on the Chinese economic slowdown. He supports the housing glut argument with a link to a Daily Mail column from 2011:
He added: ‘People there were joking that no one in Denaya could afford to live there. If these apartments sell at all, it is to speculators.’
Of the 35 major cities surveyed last year, property prices in eleven including Beijing and Shanghai were between 30 and 50 per cent above their market value, the China Daily said, citing the Chinese Academy of Social Sciences.
Prices in Fuzhou, capital of the southeastern province of Fujian, had the worst property bubble with average house prices more than 70 per cent higher than their market value, according to the survey conducted in September.
The average price in the 35 cities surveyed was nearly 30 per cent above the market value, the report said.
Or as Yogi Berra used to say; “no one goes there anymore, it’s too crowded.”
So let’s consider what China should be producing, if it is currently producing too many houses. How about more exports? I doubt the world would accept a tripling of Chinese exports, and I doubt they could find willing buyers. How about infrastructure? They are building roads, airports and railroads like crazy, and indeed Eichengreen suggests they are doing too much infrastructure as well. That leaves domestic consumption, which almost 100% of economists point to as the area when China needs to increase production.
I think that’s probably true, but I am not convinced that housing construction is all that excessive. First of all, 99% of my commenters insist I was wrong when I called the US housing bubble a surge in investment; they insist it was “consumption,” not investment. They are wrong, but in that case why doesn’t almost everyone consider the Chinese housing boom to be a surge in consumption? Which is it? Or does it depend on the country?
And what sort of consumption does China need more of? Obviously the urban middle class are doing OK. The big problem in China is the vast rural population, as well as the 100s of millions of migrant workers in the cities. Their living standards are quite low (albeit rising fast.) Most Chinese have enough to eat, and clothing is dirt cheap in China. So what comes next? If you are living in a ramshackle rural dwelling, then you dream of a sleek modern urban apartment. Yes, you might also want lots of other things, such as home appliances. And in the very long run you might want services like dog psychologists and spa treatments. But most Chinese are far from that level of consumption. So for now it’s a nice place to live and lots of stuff to put into your new house.
This is where George Carlin comes in. He pointed out that the only real purpose of a house is to have a place to “put all your stuff.” So if the Chinese need to consume far more goods (and they do) then they need a place to put all their stuff. That means more houses, lots more.
Of course there is a grain of truth in the skeptics’ critique. China has a state-dominated economy, and is building some houses in the wrong places. But that is certainly not the big story. Most houses are going up in big urban areas, where the Chinese are moving by the 100s of millions. Another criticism is that the Chinese can’t afford to live in these places. So print more money. The response is that this would create inflation. But weren’t you just telling me that Chinese housing prices were going to collapse? Is it a supply-side problem or a demand-side problem? Or a misallocation problem? I’ve tried to show that with many hundreds of millions of poor Chinese people still in need of housing, it’s not a major misallocation issue, as the vast majority of housing is being built in the cities where people are flocking in huge numbers.
BTW, Chinese industries like home appliances and cars and cell phones are also booming at a phenomenal rate.
So here’s my question for all of you China skeptics that insist they are building way too much housing, infrastructure, heavy industry, etc. What precisely do you want them to build more of? And what are the 100s of millions of Chinese living in tiny ramshackle homes to do? Sit tight for a few more decades while resources pour into nice urban services for the pampered elite?
PS. Suppose you were a homeless person living under a bridge. You had just enough money from selling aluminum cans to feed yourself adequately. Now you find a job making iPads, which pays a thousand dollars a month. Is your priority to spend most of that extra cash on even more food, or more clothing, or a place to live?
PPS. Yesterday I got my hair cut in Beijing for $4. It was much better than the $20 cuts (incl. tip) I get at Supercuts in America. I went roughly 10 or 15 miles in a taxi for about 30 minutes–it cost $6.50. In Boston it would be $40. An ice cream cone at McDonalds is 50 cents. The subway costs 32 cents, and is far better than the NYC subway. The China Daily newspaper costs 24 cents. If you priced Chinese consumption at America prices, then China might already have the largest consumption sector in the world. And if they build lots of houses it will get even bigger–much bigger.
You see consumption everywhere, far more often than you see investment. The TV channels are full of ads for shampoo and similar products. Beijing is very much a consumer society, although that’s less true of the poorer parts of China.