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MAYBE CHINESE PROPERTY IS NOT A BUBBLE?
When viewed from a tech lens, Chinese property prices make more sense.
The Chinese property market is widely considered to be in a bubble. For a comprehensive analysis, the recent published note by Ken Rogoff and Yuanchen Yang (Peak China Housing_2020_08_12 (harvard.edu)) provides a detailed study on the nature of the Chinese housing market. The key point for this post is the concentrated nature of high property prices in China. Tier 1 cities in China are far more expensive than anywhere else. The below chart is taken from Rogoff and Yang’s paper.
Tier 1 cities are Beijing, Shenzhen, Guangdong and Shanghai, and as can be seen above are at least 2 to 3 times more expensive than tier 2 cities. Using US Case Shiller Indices, we can broadly recreate a similar tier 1 to tier 2 comparison. I have tried to match up tier 1 for like to to like (Washington to Beijing, New York to Shanghai, San Francisco to Shenzhen and Guangdong to Seattle), while for Tier 2, I have opted for Detroit - I am happy for Americans to guide me on whether this is an accurate choice or not.
It is very hard to be bearish on San Francisco or Seattle property unless you are also bearish on tech. That is, even though property prices are well through the sub prime highs, property is reflecting the underlying boom in tech industry. China has also been undergoing a tech boom. According to the World Intellectual Property Organisation (WIPO), China has been the largest patent filer for a number of years now.
According to the Patent Cooperation Treaty Yearly Review 2021, the biggest tech clusters Shenzhen/Guangdong, Beijing, Shanghai were all in the top 10 tech clusters, while Seattle and New York were both outside of the top 10.
WIPO also give a breakdown of a clusters’ patents by industry. When we look at the leading tech industries, Digital Communication and Computer Technology, we find that clusters with high exposure to these areas are in fact Seattle, San Diego, Shenzhen, Beijing, Shanghai and Seoul. The Shenzhen/Guangdong/Hong Kong cluster has by far the largest number of patents in these two areas.
If tech is driving high property prices in China, then the crackdown on Chinese tech and Chinese property stocks makes far more sense. That is you cannot take the air out of Chinese property markets, without taking some air out of the tech market too.
None of this analysis says that Chinese property prices cannot fall, or activity drop off. But it does suggest that like the Japanese property bubble in the 1980s, as long as China continues to grow its tech sector, its property market may be much stronger than expected. As noted in my previous post, tech drivers also seem to be a macro factor, not only for currencies, but also for the property sector.