04/28/2009 05:12 am ET Updated May 25, 2011

China's Housing Market: Build It and They Will Come?

The 26-year old Chinese woman with whom I spoke volunteered how much it cost her and her husband to buy an apartment. She was quite pleased that they secured an apartment for 1 million RMB (about USD $147,000) by putting 30% down, A DOWNPAYMENT PROVIDED BY HER PARENTS. Clearly, this woman is part of the new wealth when you consider the average household income is still only USD 4,000 in China. The wealthy will continue to get wealthy with help from Mom and Dad. But, is there economic opportunity for others to gain a foothold in the housing market?

The occupancy rate of residential construction started dropping in May 2008 according to an Otis-China executive that tracks such statistics. The red line of vacancy continues to increase to this date. In other words, the housing supply continued to expand, even though the demand and ability to buy a residential apartment is not growing at the same rate. Therefore, the price of an apartment will drop.

Today in China, more and more twenty year-olds are delaying marriage and continue to live with their parents. A 28-year old man explained he had a girlfriend, but with 125 men for every 100 women, he is a lucky one. He has a high paying job in the tourist industry, speaks English exceedingly well and still can not afford his own apartment. Delayed marriages and not enough women to marry means lower formation of new households. These demographic facts will add additional pressure to the housing market, further decreasing the demands for residential housing.

The key message: Too much supply, not enough demand, spells falling returns on investments. A housing bubble will burst in some cities in China. It will not be due to predatory or sub-prime lending as in the U.S. It will happen due to the law of supply and demand. In Shaking the Globe, I wrote about the importance of such financial realities. In my next report from Beijing, I will discuss other economic realities I discover.