RDP 2012-04: Chinese Urban Residential Construction to 2040 1. Introduction

In 2011, 1.9 billion square metres of residential floor space was built in China.^[1] This volume is more floor space than the entire residential building stock in Australia. The scale of construction is necessary, in part, to house the 20 million annual increase in the urban population. Residential construction is a key driver of Chinese economic growth and, given its use of steel, construction is an important determinant of the demand for iron ore, which is one of Australia's most significant exports.

This paper assesses the medium-term prospects for the Chinese urban residential construction boom, using projections of urbanisation rates, building size and construction quality. Chinese urban residential construction is expected to remain at elevated levels for the next couple of decades, but growth will undoubtedly slow. As the urbanisation process winds down and as improvements in building quality become more incremental, construction is expected to peak in 2017 and fall back below current levels some time around 2030.

This projection is dependent upon a number of assumptions, and we consider the sensitivity of our projections to these assumptions. If urbanisation advances at a slower pace than envisaged, then the peak of residential construction could be close to hand. However, there are upside risks as well. The evolution of floor space per capita is quite uncertain; should this advance at a faster pace than the relatively conservative view in the baseline scenario, the high-growth phase of Chinese residential construction could continue for several more years.

Fundamentally, the construction boom is the result of extraordinary economic growth and urbanisation, which are intertwined in complex ways (Spence, Annez and Buckley 2008). Other countries, for example Korea, have experienced similar, or even more rapid, increases in the proportion of residents living in urban areas. Yet no country can compare to China in terms of the sheer scale of its urbanisation. China's urbanisation process has other distinct features. The hukou system, which determines individuals' residency status and welfare entitlements, limits labour mobility to a degree that could be responsible for a large gap in wages between urban and rural areas (Henderson 2009). There is also evidence suggesting that Chinese cities are undersized compared to some optimal level, suggesting scope for further expansion in city sizes (Fujita et al 2004; Au and Henderson 2006). This paper does not take account of these features explicitly in the analysis, but they are likely to have only minor implications relative to the influence of China's overall growth.

Construction requires steel, which in turn requires iron ore, of which Australia is a significant producer. We estimate that residential construction uses about 14 per cent of China's crude steel output. More intense use of steel, due to taller buildings and other amenities such as underground car parks, means that steel use by residential construction will grow at a faster rate than the volume of floor space built. Indeed, we project that steel used in residential construction will peak around 2024, at a level that is 30 per cent higher than in 2011.

This paper also touches on the structure of the Chinese economy and its evolution. As is well known, Chinese nominal investment as a share of GDP is high. We estimate that the residential construction share of GDP has risen from 5½ per cent in 2004 to 9 per cent in 2011. The extent of this increase is somewhat higher than suggested by the volume of floor space constructed. Quality improvements and higher materials prices could account for this.

The paper progresses as follows. Section 2 discusses past residential construction, and argues that official data understate true urban residential construction. Section 3 outlines the methodology used for our projections, and Section 4 presents those projections. Section 5 discusses the sensitivity analysis and Section 6 concludes.

Footnote

Unless otherwise specified, data in this paper are drawn from CEIC. The 2011 figure includes all construction in rural and urban areas, whereas the most commonly cited figures refer to ‘commodity buildings’ – which can loosely be defined as housing for sale in the private market – in urban areas. [1]