Wednesday, February 09, 2011

China's Low-Income Housing Shortage

By Eric Jackson, Senior Contributor02/09/11 - 06:00 AM EST

NEW YORK (TheStreet) - We often read in Western media about "the Chinese real estate market" as if it was monolithic. But that's as absurd as talking about the U.S. housing market that way.

There are obviously differences between the price of an Upper East Side townhouse and a condo in Miami. Besides geography, there's a huge distinction between the low- and high-end of the market in America today. Just a week ago, Barron's profiled how Florida -- with thousands of foreclosed low-end properties continuing to be dumped onto the market -- was seeing high-end housing in places like Naples and Palm Beach firm and even move up in for some properties.

Business School market segmentation principles apply equally to China as they do here. China's real estate market has as many permutations -- from coastal cities to Tier 3 interior cities, and high-income to low-income -- as we do in America.

All the bluster from the China bears over the past year pointing to a real estate bubble has -- more precisely -- been focused on the upper-middle and high-end of the Chinese residential market in the Tier 1 cities of Beijing, Shanghai, Shenzhen and Guangzhou. Those markets were white hot last year and caused the Chinese government to take swift and draconian action, which almost immediately took effect on slowing things down.

Although I still don't believe that end of the market is expensive by major Western city standards (like New York, London, Moscow or Hong Kong), the bigger opportunity in the Chinese real estate at the moment is in low-income housing (LIH).

Looking at the bigger picture, China's government is motivated by the goal of social harmony in the Chinese society. It knows that if it does not achieve this goal, there will be social unrest and protests. This is the goal behind the "protect 8" policy of maintaining at least an 8% growth rate in the annual GDP.

When housing started to rise at the higher end of the residential market last year, it was a concern not just for being a bubble, which might burst down the road but for causing resentment from people at the low-end of the market who found housing less and less affordable.


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