Behind Andy Xie's China Housing Numbers

In a recent article, economist Andy Xie suggested we "Fear Empty Flats in China's Property Bubble ." In his attempt to make you "fear," Mr. Xie makes the silly claim that the vacancy rate in urban China is 25% - 30%. This subject arose in China out of what appears to be a false rumor about electricity usage, which Mr. Xie first cites. As a former analyst, long ago I learned to be wary of cited numbers and to look at the assumptions that go into them. The subject is important because China's housing market is repeatedly cited by shorts as one of the main reasons they believe equity markets will fall.

First, please keep in mind that recently China's Ministry of Urban Rural Development said more than half of China's total urban housing will be torn down in the next 20 years. Those who call China's housing market a "bubble" fail to mention that a huge percentage of China's existing housing stock is old and "pre-teardown." That should be good for housing-related issues like Ehouse China (EJ) and Chinese developers as well as commodity players like Freeport-McMoran (FCX), Southern Copper (SCCO), Rio Tinto (RTP) and BHP Billiton (BHP) who produce the materials that go into China's housing.

The first trick Mr. Xie uses to get readers to "fear" is a fractions game. He tells us that if there were 32.5 million vacant "households" in urban China, it would amount to a 20% vacancy rate. Implied in this he's also telling us he believes there are only 129 million occupied households in urban China; it's simple math (occupied households would then have to be 4 times 32.5 million.) That's a pretty small number for the 625 million people living in urban China. It would be almost 4.9 people per household and is simply not credible. There may on average be 5-6 young, newly migrated workers living together in China's factory dormitories, but not all of urban China. Thus, we see Mr. Xie's fraction trick; he underestimates the real demand for China's housing.

(Note, even if we back out all of China's 200 million migrant workers who don't all live in factory dormitories, his numbers still imply 3.3 people per "household," very high for a relatively young, urban Chinese, mostly upper and middle class population with a low birth rate. In this case for every mostly upper or middle class single person living alone, there would have to be 6 people living together, or for every couple, 5. We already backed out China's newly migrated workers, and so some who live in "households.")

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