A recent media story, which power companies denied, claimed that almost 65 million power meters in urban China had registered zero consumption over a six month period, which raised a theory that there are enough empty apartments in China to house 200 million people.
However, the true figures will probably never be known, because there is little transparency in such statistical information, which has led to calls for accurate information to be published.
Without this information, policy-makers face an uphill battle, because the actual size of China’s unused apartment stock is crucial to measuring the extent and seriousness of the nation’s property-market bubble.
It is also highly likely that such data would also reveal a quantity bubble as well as a price bubble.
Price bubbles, which generally last a long time, occur primarily because of government regulation, like height limits that almost eradicate the possibility of increasing supply in accordance with demand, such as occurred in Tokyo in the past, and are occurring in London right now.
China also is experiencing an urban price bubble nationwide, but high prices in major cities cannot be rationally explained.
Rising rents can be explained easily, because it can be linked to inflation expectation, with landlords fearing the cost of repairing user wear and tear will be higher in the future.
However, China’s property bubble is exceptional, in that there is an unprecedented amount of living space available, the large number of empty apartments, which equates to the nation’s quantity bubble.
Quantity bubbles are less common than price bubbles, and usually don’t last as long, as rising supply normally forces prices down, but the influx of money in China seems to be keeping the prices higher, even though supply is still rising.
Price bubbles cause economic damage in three ways: a banking crisis; a weakening economy for several years; and adverse effect on other supply industries.
A quantity bubble ends when the building cycle changes, new supply causing prices to crash, as happened in the United States in the late 1980s, and in turn causing a banking crisis.
Quantity bubbles occurred in Southeast Asia during the 1990s, causing a market crash, and finally the Asian Financial Crisis.
In Taiwan’s quantity bubble of the late 1980s, analysts used electricity meter data to establish the number of empty flats, and concluded that 15% were empty, and today, analysts are trying the same tactic in China, compounded by the lack of reliable availability of such data.
The data that is available concludes that China does not have a housing shortage, and it’s per capita living space of one person per 28-30 square meters is higher than in Europe or Japan, and using Japan’s standard, China has enough living space for every man, woman and child in the country.
Of far greater importance, however, are the housing figures showing a huge amount of empty flats being held for speculation, and no other reason.
The total normal vacancy rate in a normal economy is determined by a world standard calculation, and is normally about 3%, compared with an estimated 25-30% vacancy rate in China.
This is speculative inventory; property is being stockpiled just as copper and other commodities are stockpiled in expectation of price rises, and are probably worth about 15% of China’s GDP.
China needs a reasoned property strategy, to avoid the problems that America is experiencing from its property bubbles; failure in America caused a crash that has lasted, and will continue to last, for many years.