Why High Land Prices in China Are Not a Bubble

Financial Impact of Social Impact

Land prices in China have been rising very rapidly; the growth has been as high as 16% per annum over eight years. This has been caused by both demand and supply factors. While it’s not realistic for this rate to continue, don’t expect a slump either, says Wharton real estate professor Joseph Gyourko.

Gyourko, along with colleagues at the National University of Singapore and Tsinghua University in China, has been studying the China housing market for some time now. It is not easy because data is difficult to come by, but the team has put together an index of housing land prices in China and is now planning a second phase to the research, Gyourko tells Knowledge@Wharton.

An edited transcript of the conversation follows.

Knowledge@Wharton: You have collaborated with your colleagues at the National University of Singapore and Tsinghua University in China on a really pioneering project, where Wharton works with other universities to create indices of housing land prices in China. Could you tell us what are some of the most significant takeaways?

Joseph Gyourko: These are real price indices for land values in China; not housing, but the land underneath the housing. The takeaways are: At a national level, there has been remarkably strong price growth in land values. We have eight years of data from 2004 through the first half of 2013, and the compound annual growth rate (CAGR) is just over 16% per year. So that’s really a strikingly large number. And that’s the aggregate over all of China.

There is a lot of variation across regions and cities, however. In that sense, China is somewhat like the U.S.: It’s a very big country, and you do not get the same price growth everywhere. At the city level, Beijing has been growing astronomically — 22% CAGR since 2004. Markets like Jian are very different: 4% to 8% in some of the central and western cities of the country. So one size does not fit all in Chinese land markets.

Knowledge@Wharton: As you looked at all that data, what was the biggest surprise?

Gyourko: I’m not so sure I was surprised. I expected high price growth rates. One of the things that’s clear is you can’t continue to have 16% per annum growth, because prices will go to infinity fairly quickly if you have another decade of that. But I don’t know that I was surprised by that. I think what probably surprised me most is how varied the results are across cities.

Knowledge@Wharton: What implications would you say your findings have for international residential developers who may be interested in opportunities in China?

Gyourko: I think you have to be worried about how high the price growth has been in the past and you have to carefully consider how long you think it can continue at its present high trend rate into the future. You have to be cautious. This is not advice that there’s an obvious bubble, that there’s going to be a crash, because I don’t know that for sure. What I think I do know for sure is that I will be very surprised if we have another eight years of 16% CAGR.

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Originally Published November 5, 2013