USA Population Vs China = 4, USA Home Vs China = 2

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

December 2006

Your humble author had had the opportunity two months ago to speak to counterpart professionals in Canada and the USA on China real estate markets. In the process, the audience raised the question and concern about the emerging economy of China, citing that as people get richer, they also tend to want bigger homes, perhaps similar to typically what they in North America have i.e. a 2,200 ft2 detached house with 4 bedrooms plus a double garage. Thus, global resources would be put in serious shortages, not to mention environmental challenges.  

Not being an economist or environmental engineer, and while the concern is understandable, your humble author tends to think this could be overestimated, not on the basis that people in China do not want bigger homes, but that the (land and real estate) economics there would probably prevent that from happening. Here’s the rationale: 

A)     The overall broad picture = the USA and Canada put together has around 330,000,000 and China has over 1,300,000,000, thus say for convenience China has around 4 x the people of North America. However, IF one is count only 10% of Canada’s area (as 90% of its population live in 10% of the total area), the area of the USA and Canada combined would be more or less equal to China. In short, China has 4 x the population pressure on land which the USA and Canada combined has. Naturally, this is a very rough way to look at it as the productivity of the land, e.g. arable land proportions etc, has to be taken into account yet this falls outside the scope of this article (and the capability of your humble author = nonetheless, latitude-wise, both USA & Canada and China share quite a bit of common ground).

B)     Real estate economics = using a very simplified angle, a home consists of a land portion (and this has nothing to do with whether the land is freehold or leasehold, as any building structure, from a simple timber house to a concrete high rise condominium, requires to rest on a piece of land) and a building (construction) portion. The overall budget which a household can afford for a home is relatively FIXED, dependent usually on such factors as family income, job security (or its feeling thereof), macro economy, interest rates, and so on. That is to say, this fixed home buying budget can be allocated in such a way that MORE is spent on a very expensive location (land) and LESS on the size of the home (building) OR vice versa, less expensive location for a bigger home. And this has nothing to do with whether the household is rich or not, as a wealthy household who owns a 5,000 ft2 condominium in Manhattan can afford to have an even much bigger detached house (estate mansion) somewhere in a well-to-do suburb of New York City. Likewise, this also does not depend on the average home price or GDP per capita level, buyers in a US$1,700 per capita economy (China) face the same questions which buyers in a US$35,000 per capita economy (USA) would face. We all need to make choices comes home buying.

C)    Urban economics = the fact that China has 4 x the people implies there are generally 4 x the number of households competing for the same and any piece of land in China compared to the USA and the southern belt of Canada. In short, proportion-wise, the typical China household needs to spend more on land than its North American counterpart, assuming any given level of price and income level. IF China is to use no more resources than North America in housing its population, very roughly the average home in China would (need to) be around 2,200 ft2 / 4 = 550 ft2. IF China is like Hong Kong, which average residential hovers around this 550 number, then probably China needs to use no more resources to accommodate its population than North America. BUT China is not like Hong Kong, and baring verification, the typical home in China has around 1,000 ft2 (or 93m2 which is very close to the recent government dictate of 90m2). That is to say, unless the households in China generally start to and are willing to get themselves used to a 550 ft2 home, which is quite a social and cultural challenge in itself, the 1,000 ft2 average size is likely to remain intact. If so, we shall come to the next point.

D)    Around 2 x the resources of North America are required to accommodate the population in China = [1,300,000,000 / 330,000,000] x [1,000 / 2,200] = 1.79. Now, admittedly, this is highly rough and North American detached houses are made generally of timber while the condominiums in China are built of concrete and steel. Also, there could be differences in building technologies and thus in use of resource efficiency. Nonetheless, as stated, this is outside the scope of this article. The POINT here is that yes, China is likely to use more resources in accommodating its population in the long run (the urban population overall does not have too urgent a housing need and the really rural areas have other more pressing challenges than housing), BUT it will not be 4 x that of the USA and Canada.

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