Beijing home prices fall 21% in Q1

China CPI Apr12.pngInvestment bankers and development economists like to talk about China being a ‘middle class’ country. Yet Asian Development Bank data shows that 96% of the population earn less than $20/day on a (PPP) Purchasing Power Parity basis.

Similarly, China’s ‘luxury market’ remains very small. Latest data suggests it was just €12.9bn ($16.9bn) in 2011, or <0.3% of China's total GDP. The UK is spending almost as much ($14.9bn) just to host the London Olympics for 2 weeks this summer.

These myths matter, because they help to explain why China's housing market is in such trouble. The official China Daily reports that Beijing new home prices fell 21% in Q1. But they still averaged Rmb 12400/ ($1950) sq metre.

Equally, average house price to income levels were 14:1 in Tier 1 cities such as Beijing in January. By comparison, US ratios at the height of the sub-prime boom were ‘only’ 5:1. These prices are clearly now unaffordable for most people, without stimulus subsidised loan finance.

Equally, low wages mean that food price inflation is vitally important for most people. As the chart from the Wall Street Journal shows, food price inflation (green line) climbed again to 7.5% in March. Vegetable prices surged 21%, whilst meat and egg prices rose 11%.

This makes it very difficult for the government to launch further stimulus efforts, like those seen in 2009-10. Instead, as premier Wen has emphasised, the focus remains on further reducing home prices to bring them back to a “reasonable level”.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

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