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.