i2live: China projected to reach 10 million new homes built per year, but estimates considered 'optimistic,' as nation's housing boom could be affected by slowing economy, credit growth and heavy reliance on investments, Forest Economic Advisors say

LOS ANGELES , August 8, 2013 () – China’s housing boom has been projected to reach 10 million new homes built per year, but those estimates are considered “a bit on the optimistic side,” as the nation could be affected by a slowing economy, credit growth and a heavy reliance on investments, said Brendan Lowney, principal and founder of Forest Economic Advisors (FEA), in an Aug. 7 i2live Webinar entitled, “Will Chinese Demand for Wood Products Keep Growing?”

“You’re looking at this urbanization rate at 1% per year, which is 10 million rural residents moving in to the city and the fact that 50% of the housing stock is substandard,” said Paul Jannke, a principal of FEA, a Massachusetts-based consultancy to the forest products industry. “The fact that the Chinese government said it would build 7 million new housing a year … these were all reasons that we were going to see continued explosive growth in North American exports to China.”

However, there are big risks, Jannke said, as forecasts called for stabilization in those exports. He noted that North America’s exports declined in 2012 and are down year-to-date in 2013, that Russia has gained market share and that the Chinese government has policies limiting new investment in housing.

Macroeconomic factors would also affect the housing boom in China, Lowney said, noting these three:

Slowing Chinese economy
“China’s been growing at double-digit growth rates in terms of its official GDP for the last 30 years and with that we see a huge upturn in imports of wood products and construction in China,” said Lowney.

However, “these numbers should be taken with a huge grain of salt,” he said, citing a WikiLeaks cable in which a Chinese premier said he doesn’t look at GDP numbers.

Rather, the premier looks at data such as cargo shipments, energy consumption and credit expansion—indicators that show “Chinese growth has been more choppy in the past and a bit slower than the official GDP growth would indicate,” Lowney said.

China’s heavy reliance on investments
Lowney pointed out that China’s economic structure is very different from that of the U.S. and other Western countries. While consumption makes up the overwhelming majority (66%) of the U.S. GDP, the majority (47%) of China’s GDP is in investments.

“It’s important to note that investments tend to be more cyclical and more volatile than the other sectors of the economy,” Lowney said, highlighting that 60% of China’s investments are construction-related, which is significant to the wood sector.

“If we think investment is going to come down, and it is over the next couple of years, then it’s obviously going to have an effect on overall demand for Chinese building products and wood products,” Lowney said.

Chinese credit boom
Lowney noted that China is in the midst of a credit boom, as its overall credit-GDP ratio has grown by about 20% in 2012 and has risen from 120% to 200% in the last five years.

“When credit growth expands and investment expands, it’s a pretty strong relationship between credit growth and a financial crisis around the corner,” Lowney said.

But in the short term, exports are not likely to fall significantly, Jannke said, highlighting the positive signs that include the government’s promotion of wood in construction and the view that wood is a green building material and more energy efficient than concrete. He also noted that more Chinese architects are using wood for nonresidential buildings and that lumber usage is increasing.

In the long run, however, “we’re not super optimistic,” Jannke said. “If we’re looking at housing starts in North America … we’re simply not going to produce enough lumber for the North American market and the Chinese market.”

While the forecast for 2014 exports to China shows a slight recovery compared with 2013, Jannke said, it’s not a long-term trend.

“We do see North American prices being a little bit lower in 2014 than they are in 2013, so that’s going to benefit the exports to China,” Jannke said. “What’s going to help drive those prices down is an increase in production in North America, so there’s going to be excess lumber and wood to ship to China.”

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