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Behind Andy Xie's China Housing Numbers

Stocks in this article: EJ FCX SCCO

China's economy has grown at 10% per year for 29 years. At a 10% growth rate, China's economy is almost 4 times the size it was 15 years ago. If the shorts believe Chinese residents can on average only afford 98 square meters per "household" today, how were they supposed to be able to afford on average 70 square meters 10-15 years ago when China's GDP was 25% to 35% of what it is today? No, that old housing stock is much smaller on average. The good news is they can now afford more housing.

The simple fact is that there are tens of millions of very small, very old apartments in urban China that are "pre-teardown," my guesstimate is somewhere between 40-80 million units between 25-50 square meters in size. We know it's a big number because Mr. Xie tells us only 1 billion square meters have been torn down in the past 10 years and yet there had to be several times that number of older tiny units to house the more than 400 million people who lived in urban China in the mid to late 90's. Where in many countries these units may have already been torn down, in China's cities that are flooded with as many as 15-20 million new migrant workers each year, the useful life of old, small apartments can be extended.

Between a realistic estimate for people per housing unit and in light of tens of millions of old, smaller apartments, clearly there are many, many more than 129 million occupied housing units in China's cities. If (when we include migrant workers) the real number was 50% higher, it still only implies 3.2 people per housing unit which would be almost 40% higher than in the U.S., even though they have fewer children per household. China's real need for "households" is much, much larger than Mr. Xie assumes, and as incomes grow demand rises quickly.

I don't doubt that China's urban vacancy rate is higher than most major countries; it needs to be to accommodate the huge migration of new residents moving from rural areas each year. There may be 32.5 million or more vacant units in urban China; it's speculation and it frankly doesn't matter much. There is a surplus of old and small housing in China that is in less demand than modern era housing. (Note, you often hear about the recent 12% increases in the price of China's new private housing which averages just slightly more than $100 per square foot, but rarely hear that for low income housing the price has just barely risen of late.)

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