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we are speaking today with
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professor joe jerko of the wharton real
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estate department
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uh joe thank you very much for joining
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us today
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it's a pleasure to be here so you uh
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uh have collaborated with your
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colleagues at the national
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university of singapore and qingwa
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university in china
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on a really pioneering project
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where wharton worked with these other
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universities
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to create indices of housing land prices
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in china could you begin by telling us
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what are some of the most significant
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takeaways
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sure sure and these are real price
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indexes for land values in china not
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housing but the land underneath the
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housing
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the takeaways are as follows number one
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at a national level
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there has been remarkably strong price
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growth
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in land values it works out we have
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eight years of data from 2004
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through the first half of 2013
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and the average annual compounded price
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growth
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is just over 16 per year
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so it's really a strikingly large number
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um and that's the aggregate
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over all of china there is a lot of
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variation
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across regions and cities however in
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that sense china's
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somewhat like the united states it's a
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very big country
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and you do not get the same price growth
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everywhere
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at the city level beijing has been
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growing
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astronomically strong 22 percent
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average annual compound growth rate
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since 2004
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markets like gian very very different
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four to eight percent in some of the
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central and western cities of the
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country so it's not one size does not
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fit all
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in chinese land markets so as you looked
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at all the
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data what was the biggest surprise for
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you
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i i'm not so sure i was surprised by any
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i expected
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high price growth rates
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one of the things that's clear is you
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can't continue to have
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16 per annum growth because prices will
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go to infinity
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fairly quickly if you have another
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decade
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of that but i don't know that i was
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surprised by that
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i think what i probably surprised me
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most is how varied
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the results are across cities now what
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implications would you say
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your findings have for international
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residential developers who may be
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interested in
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opportunities in china i think you have
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to be worried about
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how high the price growth has been in
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the past
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and you have to carefully consider how
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long you think
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it can continue at its present very high
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trend rate
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into the future you just have to be
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cautious this is not
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advice that there's an obvious bubble
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that there's going to be a crash because
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i don't know that for sure what i think
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i do know for sure
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is i will be very very surprised if we
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have another eight years of 16
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per annum compounded growth i'd like to
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come back a little later to the 16
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number uh which i think works out to
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almost 200 percent over the course of
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your study correct
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uh but but for now you know just to set
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the background
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uh can you help explain for our audience
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a little bit about how
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china's land market differs from
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uh the market in other countries and
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what challenges did that pose for you as
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you went about your
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research sure china's really very unique
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in this sense
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if you study and look at housing prices
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across the world including in the united
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states
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you never see land values you don't see
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vacant land being sold in the data
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so what you see are house prices which
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the price of my house or your house
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in a price index is the sum of the land
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value
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and the improvements the building itself
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china's different
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the communist party of china owns all
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the land
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in urban areas the local governments do
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so if you're a developer
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mukul and you want to put up a private
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residential
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complex you have to purchase the land
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from the local government and what you
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purchase is
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actually a land lease
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you purchase the rights to use the land
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for up to 70 years in residential
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for residential development which is
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what our index is all about we
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only cover land sales that are going to
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be used for residential development
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not other commercial development
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so the prices we're reporting and the
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indexes we're reporting
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are technically those for leasehold
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estates
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now the way it works in china is the
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developer makes
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a one-time lump sum payment for the use
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rights of up to 70 years
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and we treat that one-time payment as
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the sales price
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now we we think that's a pretty
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reasonable assumption
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largely because the usage rights are for
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multiple decades
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and as many of the listeners here will
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recognize the present value of anything
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50 to 70 years from now it's pretty
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close to zero
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so we think that's a good assumption now
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in 25 years that may not be such a good
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assumption because you may be near the
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end
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of some of these usage rates but that's
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what makes it
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very very different in china china's
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virtually unique as far as i can tell
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in that respect and and what challenges
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did that pose
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as you went about your research well
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there were many challenges one is
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data accumulation in china is very very
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difficult
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um in i'm sure the government the
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central government
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has much data that they don't release
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and aren't going to release the
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academics like
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me or my co-authors so what we
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did was to essentially scrape the
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websites of the local land use
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authorities
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there was a national law passed more
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well over a decade ago that required the
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posting
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of the winning bidders in land auctions
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so and it also required
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that the land be transacted by a visible
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auction
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was an anti-corruption move as you can
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imagine before
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this law came into being or could be all
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types of side payments between
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developers and local officials
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so we have a number of people who
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literally scrape the websites
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of the 35 local land authorities from
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whom we collect
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data and you might imagine a bunch of
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students graduate students and
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undergrads particularly in beijing who
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are cleaning the data and making sure it
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makes sense
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so let's come back now to to the
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question of the rate of growth
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means as you said 16 percent a year 200
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percent over the course of the of of
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eight years
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um just to put those numbers in
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perspective
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do we know how those kinds of price
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increases
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compare to housing land price increases
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in other countries
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and what are some of the factors driving
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that increase in china
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we cannot directly compare them to land
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prices in other countries simply because
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we do not
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see land value measured consistently
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in other countries a couple of comments
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though on this
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one in an eight-year period for prices
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to go up 200 percent
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is really quite extraordinary very
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extraordinary
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it's much higher than the government's
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published data
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on housing prices which leads me to
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believe
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they're really understating the house
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price rises
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because land's got to be a big component
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of value
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in china that's number one so it's got
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to be high
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the other thing if you go to my website
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and download the data which by the way
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everyone can do just on
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on my website we we welcome people to
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look at
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and study and use the data as they will
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you will see a couple of
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different periods in other words this 16
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figure you and i have been discussing
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it's not a smooth rise
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up so just i i wrote down a couple of
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notes
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the first really big increase in
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aggregate land values
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in china occurred in 2007.
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literally in three quarters from the
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first to third quarter of 2007
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real land values in aggregate across the
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35 cities we're tracking rose 71 percent
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just in that nine month period now
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following that dramatic rise
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real prices fell 34 until
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the first quarter of 2009 and then you
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ask about the factors driving
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some of this series from 2009
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to the end of 2010 prices more than
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doubled
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they went up 108 percent according to
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our index in
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real terms that period coincides with
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the great chinese stimulus
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so it's pretty clear there are a number
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of drivers
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some of this is government policy
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related but
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some of it is clearly demand side
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related which is there is an incredible
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move from rural areas
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into urban areas in china so demand is
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very very strong
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and in some of these areas although this
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is the subject of future research
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it's unclear how much new supply is
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actually
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being created the my two co-authors and
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i
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are working on a project to measure
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supply in these markets now so i'll have
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more to say on that you know
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sometime next year hopefully but clearly
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there's a lot of demand
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but you look at these data in the series
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government policy matters in china it
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matters a lot to their local land
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markets
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no i think that sounds very reasonable
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apart from the stimulus
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did you see any other political factors
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at work
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um only not in our indexes so the
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indexes are just created from the data
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when you look at the nature of
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how households in china think about
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owning
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many of them pretty clearly view it as a
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store of value
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in a way that you and i don't in the
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united states which is
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my house i own a home because
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it provides shelter for me and my family
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my kids get to go to the school district
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in which my house is located and
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the like in china investment
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restrictions are much more severe than
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they are in the u.s
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the typical household there could not
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diversify
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by buying the s p index and the like
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so for them a lot of households i think
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pretty clearly are buying
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because they view this as a good store
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of value a hedge
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and and the like so there are different
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motivations in china
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than there are for most u.s households
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in particular
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i see uh you also referred to earlier
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the fact that
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uh house prices in beijing uh
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in the beijing area land prices land
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prices
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in the beijing area increased much
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faster than other parts of the country
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what explains some of these regional
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variations i i think a couple of things
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one we do know that demand growth that
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is
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in migration to beijing and particularly
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some of the east coast cities
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is very very strong so partly its demand
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what i also suspect but don't know and
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again this is the future research
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is that it's probably harder to build in
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some of these coastal markets
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but we actually don't have good measures
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yet
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about how much new supply is coming on
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in each of these markets but like i said
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hopefully
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in a future date you'll have me back for
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another interview and we'll be able to
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say something about that
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my economics gut is it's both supply and
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demand
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we can pin down demand we can't yet pin
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down
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the contribution of the supply side to
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that remarkable growth
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right now one really fascinating
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phenomenon in china's housing market
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that i've heard people talk about
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is that developers acquire land from the
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government as you explain right
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and then they just go ahead and build
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without really estimating
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what the real demand is from consumers
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and this has led to the creation of
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these so-called
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ghost cities with a lot of houses with
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no one living in them
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uh did did you take some of these
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factors into account
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and and and what do you think of this uh
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phenomenon
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one it the phenomenon definitely exists
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you can see it documented their news
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teams that show you these ghost cities
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but in the 35 markets we covered
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there aren't ghost cities per se in
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these
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in these markets so we're looking at
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believe it or not china has
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well over a hundred i believe cities or
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urban areas with more than a million
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people
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we're looking at 35 large ones
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the ghost cities phenomena is not a
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major
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issue in in them you don't see entire
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developments or swaths of
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beijing for instance that are vacant
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so that's well that phenomena clearly
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exists in some parts of china
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it tends to be in outlying areas and not
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in
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the major markets so in other words it
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didn't affect your data and didn't have
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an impact
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no we don't we don't really see that
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phenomena
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a lot we're looking and trying to
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measure vacancy rates believe it or not
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there's no
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published vacancy rate series in china
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it's one of the things we're trying to
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do in current research
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we've looked first at beijing there's
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not a lot of vacancy
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in in beijing in other words it doesn't
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look like they're just ghost
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developments throughout that city at all
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now
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maybe we'll see them in some of the
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other 34 markets that we track
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but thus far we we just don't see that
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in the markets we're did you find any
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evidence of a land bubble in china
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well i i i don't know what a bubble is
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per se i find it i
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i don't believe you can have another
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eight years of 16
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per annum growth so that means the
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bubble i don't know it means prices are
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very high
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um they're high relative to incomes of
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the people buying the housing units that
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the developers are putting up on these
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plots of land
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so i'm a firm believer you cannot have
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this level this trend rate of growth
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continuing
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i don't know whether it's a bubble it's
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back to my advice to developers and
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investors you have to be very cautious
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look at the local demand
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and supply fundamentals i think there
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are some markets where they clearly
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still make very good sense
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and others where i'd be really worried
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about the sustainability as you look to
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the future
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what impact do you think that the
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economic slowdown that we see these days
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in china
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that could have on land prices well i
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again
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it's going to come through both supply
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and and demand
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i'd be more worried about supply effects
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that is developers not cutting back
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sufficiently
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on development to accommodate the lower
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trend growth rate
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i i suspect there's going to still be
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rural
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in-migration into urban areas in china
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because the income differences between a
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factory job
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in wuhan or qingdu even off the coast
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and being a you know a farmer are very
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very high and you're going to see that
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movement
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the question is has the trend growth
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rate in china slows
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will you see development slow enough to
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accommodate it so i think the biggest
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risk
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will be from over supply in markets
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and like i said that we we don't have
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good measures of oversupply yet
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although that's something we all need to
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be thinking about going forward
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uh you spoke earlier about some future
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research
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uh what's the next phase of your study
00:16:20
going to be and what we're looking at
00:16:22
next in china so a couple of things one
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we will continue to update the indexes
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every quarter
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will update the national index the city
00:16:29
and regional indexes only come out every
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six months
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or every year that has to do with data
00:16:35
availability issues
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so that's one we'll continue to update
00:16:39
this and number two
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near to my heart and to all of our the
00:16:43
whole research team
00:16:44
is trying to get a handle on how much
00:16:47
new supply
00:16:48
has been created and how much you need
00:16:52
given that it looks like demand growth
00:16:55
while still going to be substantially
00:16:57
positive in china china's not going to
00:16:59
go negative
00:17:00
but the difference between seven to
00:17:02
eight percent growth and 12 percent
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growth
00:17:05
is a lot so the the next big project
00:17:08
is what has to happen to supply
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to make the market stay sane or
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be seen in a world where trend demand
00:17:16
growth is
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50 to 60 percent of what it used to be
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right and
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in conclusion joe this if you if there
00:17:24
were some
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ceos of international real estate
00:17:27
companies who asked for
00:17:29
advice about china and the land market
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there
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uh what would you tell them well i tell
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them what you have learned so far
00:17:37
one just be very careful um the data in
00:17:41
china are hard to come by
00:17:42
and it's hard to create stuff so make
00:17:45
sure you're looking at
00:17:46
real data and good data and then you
00:17:49
know just be realistic on what you think
00:17:51
demand growth is going to be and as
00:17:54
carefully as you can
00:17:56
try to measure the supply competition
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because one of the things we learned in
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the us
00:18:01
is its supply matters not just demand
00:18:04
god joe thank you so much for speaking
00:18:06
with knowledge at work
00:18:07
my pleasure thank you
00:18:31
you
