China's property market

JUST how bad is China’s housing bubble? One important measure—the most important for those trying to get a foot on the property ladder—is affordability. Many believe that Chinese housing prices have soared well beyond the reach of ordinary people. There is some truth to that. But a closer look at the data reveals a more complex picture. The Economist Intelligence Unit, our sister company, created a city-level index to track the relationship between housing prices and incomes. Two points stand out.

First, the country’s biggest cities such as Beijing and Shanghai, with populations of more than ten million, are in a class of their own in terms of unaffordability. Homes are markedly cheaper in almost all slightly smaller cities. House prices are on average 14-fold higher than annual household incomes in megacities. For cities with populations of less than ten million, the price/income ratio is eight.

Second, regardless of city size, housing has become more affordable over the past four years throughout China. At the peak, in April 2010, house prices were nearly 12-fold higher than household incomes; that has dropped by a quarter to less than ninefold today. Indeed, the bigger concern, especially in smaller cities, is that China suffers from an over-supply of housing. This is the more negative way to interpret the improvement in affordability—that so many homes have been built that prices are now declining quickly relative to incomes.

This index is constructed by dividing the average price of 100-square-metre homes (a typical family-sized dwelling) by annual household incomes in each city in the EIU survey. Further information on the methodology can be found here.