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Sorry didn't see your message last night. You made very good points, and that’s why I said in my original male article that 不排除一些有先发优势的大城市由于一定时期内资金，人才的持续流入而造成房价在较长时期内居高不下.
First of all, an equilibrium has to be reached eventually, when the crowdiness, the pollution, the crime rate, and per capita public resources(which is the reason why many people chose to live in these cities) etc. can not justify the housing price any more. Whether that point has been reached is everybody’s guess, but human nature, such as greed, fear and herd behavior will inevitably, if hasn’t already , drive housing valuation far beyond that equilibrium. Boom will always be followed by bust, it never fails, because it’s encoded in human psychology. When that happens, it overshoots on the down side too.
Secondly, as you said, there are many factors contributing to housing price, industrialization and urbanization being one, which, however, has a lot of unknowns, one of them being, to put it lightly, whether China can sustain it’s growth when faced with so many constraints and uncertainties. On the other hand, the population factor will always be there, rain or shine, in sickness and health, for rich and for poor, and it always works against housing price(See ZFY's math downstairs).
Thirdly and most importantly, valuation is the key. The best measure of housing price is:
1. affordability, the % of income spent on housing, an analogue to Engel Index for housing. I’m sure average New Yorkers spend much much less of their income on housing than average Shanghainese.
2. cost of alternatives, like rent/purchase ratio. in many major Chinese cities, this ratio is exceeding 500, meaning you can only rent out a 1 Million RMB house for 2000 per month, and that’s before depreciation(tax deductible in the US, but not in China as far as I know), carry costs, idle costs and the risk of your tenets defaulting. This is a gross return of 2.4%, worse than riskless treasure bonds. When costs and risk are adjusted, this number can very well be negative. The international norm should be around 200-300, plus tax benefits.
3. Cost plus profit margin. The cost of construction is very well below 3000 RMB per square meter even for the most expensive house. The rest is the cost of land, selling costs and profits. Wow.
In a hurry so sorry I had to write in English because I type Chinese very slowly. Thanks for your and everybody's interests and comments!
First of all, an equilibrium has to be reached eventually, when the crowdiness, the pollution, the crime rate, and per capita public resources(which is the reason why many people chose to live in these cities) etc. can not justify the housing price any more. Whether that point has been reached is everybody’s guess, but human nature, such as greed, fear and herd behavior will inevitably, if hasn’t already , drive housing valuation far beyond that equilibrium. Boom will always be followed by bust, it never fails, because it’s encoded in human psychology. When that happens, it overshoots on the down side too.
Secondly, as you said, there are many factors contributing to housing price, industrialization and urbanization being one, which, however, has a lot of unknowns, one of them being, to put it lightly, whether China can sustain it’s growth when faced with so many constraints and uncertainties. On the other hand, the population factor will always be there, rain or shine, in sickness and health, for rich and for poor, and it always works against housing price(See ZFY's math downstairs).
Thirdly and most importantly, valuation is the key. The best measure of housing price is:
1. affordability, the % of income spent on housing, an analogue to Engel Index for housing. I’m sure average New Yorkers spend much much less of their income on housing than average Shanghainese.
2. cost of alternatives, like rent/purchase ratio. in many major Chinese cities, this ratio is exceeding 500, meaning you can only rent out a 1 Million RMB house for 2000 per month, and that’s before depreciation(tax deductible in the US, but not in China as far as I know), carry costs, idle costs and the risk of your tenets defaulting. This is a gross return of 2.4%, worse than riskless treasure bonds. When costs and risk are adjusted, this number can very well be negative. The international norm should be around 200-300, plus tax benefits.
3. Cost plus profit margin. The cost of construction is very well below 3000 RMB per square meter even for the most expensive house. The rest is the cost of land, selling costs and profits. Wow.
In a hurry so sorry I had to write in English because I type Chinese very slowly. Thanks for your and everybody's interests and comments!
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