China homebuyer’s pain index

Cross-posted from Investing in Chinese Stocks.

A new map shows the China homebuyer’s pain index:

In the red zones, home buyers have to scrape together every single cent they earn for at least nine years — without spending anything even on food — to cover the down payment for a home no bigger than 80 square meters in floor space.

The down payment makes up an average 30 percent of the home price.

According to this “map,” which has become popular on the web since Friday, home buyers in Beijing are the third most miserable groups after those in Hong Kong and Macao, where ordinary wage earners have to save 19 and 14 years respectively for the down payment.

……Fifteen cities are printed green on the map, including Tianjin, Harbin, Qingdao, Wuhan, Kunming, Haikou and Guangzhou. Home buyers there need to save from five to eight years for the down payment.

……It is relatively easy to buy a home in the less developed western cities, including Urumqi, Xining, Xi’an and even Chongqing Municipality, and landlocked cities of Taiyuan, Changsha and Shenyang, where an average wage earner needs to save for less than four years. These cities are printed blue on the map.

Here are the maps. The first one is the pain index, next is monthly salary and finally home prices per sqm. On the pain index, the criteria is as the article states: an 80 sqm home, 30% down payment, all money goes towards saving for the down payment.

Recall that Andy Xie said home prices per sqm should drop to 2 months average salary. Looking at the monthly salary and price charts, it shows that most of the cities in the blue are right around that figure. (If a house is 80 sqm and a person earns enough to buy 1 sqm each two months, they would need 160 months to buy the house with cash. The down payment is only 30%, or 48 months.) Price declines of 10% to 15% today would bring them into that range. In the green areas, declines of 20-40% are needed, while those in the red would need to see some significant declines, but some of these areas such as Shanghai and Beijing are always going to sell at a premium.

Estimates at the start of the year pegged wage growth at 10% or more in 2014 and wage growth is a goal of the current economic plan. For the areas in blue, if there’s no real estate crisis in the next year and no wider economic crisis that slows wage growth, the odds of a real estate crisis will be greatly reduced by rising wages. These cities have lower wages on average, making them competitive with the more highly priced eastern provinces and are generally less developed, providing the opportunity for infrastructure investment to boost GDP in a slowdown. However, the pain index understates the pain by a significant margin. If the average home buyer in China wants 100 sqm instead of 80 sqm, the problem is 20% worse.

In the green areas, there’s a greater risk of price declines, particularly further to the east where there is large inventory (the third chart of home prices with the concentration of green dots in Jiangsu and Zhejiang is a large area of concern). These cities will be at risk for a few years even with strong wage growth. The biggest risks are the cities with a high reliance on land sales for revenue and high housing inventory, such as in many cities across Zhejiang province. A decline in real estate could damage private finances, government finances, as well as bank balance sheets in the region, leading to a decline in investment and much weaker GDP growth.

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David Llewellyn-Smith
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  1. The figures across the board are still grossly inflated. Three times annual HOUSEHOLD (not individual) income should be the “affordability ceiling” … refer …

    2014 10th Annual Demographia International Housing Affordability Survey …

    China: Big Bubble Trouble

    New Zealand Bubble Economy Is Vulnerable

    • From a simple structural definition of an affordable housing market …


      For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey Schedules for guidance).

      The critically important Development Ratios for this new fringe starter housing, should be 17 – 23% serviced lot / section cost – the balance the actual housing construction.

      Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3, through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.

      …. And to make it abundantly clear, the 1st Qtr report of the Texas housing market from The Real Estate Center A&M University …

    • China Home-Price Growth Slowdown Spreads on Discounting – Bloomberg

      Three time bombs in China’s property bubble – beyondbrics – Blogs –

      Gloom deepens for China property developers – beyondbrics – Blogs –

    • The key message with the above postings is that housing development / construction is a very formulaic business … and has been since the time of Bill and Alfred Levitt creating the modern production industry following WW11.

      Researchers need to focus on the structural approach to ascertain what new housing should cost in specific housing markets, so that the pricing relates to the underlying incomes of specific markets.

      The burst bubble experience in Ireland 07/08 needs to be studied closely. Refer to the 2008 Demographia Survey and this years one (accessible via ) noting in particular the changes in the Median Multiples. Some 5/6 years following this collapse, it is possible to assess the social, political and economic damage of this event.

      Note the Median Multiples for China are likely way higher than those of Ireland. “Multiple stretch” is an extremely significant factor.

      The Australian, New Zealand and United Kingdom bubbles are also greater than the Irish one. This is covered within “China: Big Bubble Trouble” … and too .. “New Zealand’s Bubble Economy Is Vulnerable”.

      The superficial financial analysis of housing bubbles is inadequate.

      Researchers need to get underneath that in to the nuts and bolts structural approach, so that the significance of them is adequately understood.