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Urban Residential Construction and Steel Demand in China | Bulletin – April 2024

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Abstract

Investment in Chinese urban residential real estate has been declining since 2021, and
demand for steel by the sector has also slowed considerably. Despite this decline,
overall demand for steel in China has been resilient due to strong growth in
manufacturing and infrastructure investment, which looks likely to continue in the near
term. This article provides a projection for urban residential construction in China to
2050, suggesting that construction in China has peaked and that demand for steel will
decline in the longer term. This will weigh on overall steel demand in China, though
there remains considerable uncertainty around the longer term outlook for demand from
other sources.

Introduction

Urban residential construction has been a major contributor to Chinese economic growth since
the 1990s, but has declined in recent years due to a number of factors. The sector
has also been one of the largest sources of steel demand in China until recently. The
decline in construction and in steel demand by the sector could weigh on overall investment
growth in China in the long term and could also have significant implications for countries
like Australia that export iron ore to China.

This article briefly discusses the recent downturn in Chinese urban residential construction
and the near-term implications of this downturn for steel demand. The article then examines
the long-term outlook for urban residential construction and steel demand in China, using
new data and assumptions, and a new approach to estimating demolitions, to provide a
projection for urban residential construction to 2050.

Recent developments in China’s urban residential construction
sector

Conditions in China’s urban residential construction sector began to deteriorate in
2021, and they remain weak. This weakness, which followed a period of very rapid growth,
reflects a combination of supply and demand side factors. On the supply side, authorities
introduced the ‘three red lines’ policy in late 2020, which aimed to address
financial stability risks by making it more difficult for highly leveraged developers to
access credit (Hendy 2022). Authorities also introduced new demand-side tightening measures
in many cities where housing prices had accelerated after the easing of China’s initial
COVID-19 restrictions in 2020. These measures, which included
time limit restrictions on the resale of new housing and eligibility requirements for
housing ownership, contributed to slowing demand for new housing. Declining revenue from new
(typically in advance) housing sales and tighter access to credit, in turn, forced some
developers to suspend work on their existing projects, resulting in the value of developers’
residential investment in the economy decreasing by the end of 2021.

Several factors have contributed to the persistence of the downturn in investment since 2021.
The suspension of existing work by developers led to rising concerns among households that
homes they had purchased prior to construction would not be delivered. This concern,
combined with slowing income growth and rising uncertainty around the economic outlook, has
weighed on housing demand. Without income from new sales, funding challenges for developers
have continued to worsen. At the end of 2023, developers’ residential investment in
China was around 20 per cent below its 2019 average level, and national new
housing sales were almost 50 per cent lower (Graph 1).

Graph 1



Graph 1: A two-panel line graph of the level of residential investment by developers and the floor area of new housing sold by developers. It shows investment and new housing sales have fallen by around 50 and 20 per cent respectively from their recent peak in 2021.

Although authorities have provided material policy support for the residential construction
sector since late 2021, there are few signs yet of recovery in the sector. Since 2021,
authorities have guided mortgage costs for households lower, extended eligibility for home
ownership in large cities, and largely removed limits on how many homes households can own.
They have also repeatedly guided banks to expand their lending to developers, particularly
to support the completion of unfinished housing. Despite this easing in conditions, new
housing sales have declined, and most private developers continue to face considerable
funding challenges. These ongoing challenges continue to pose a risk to financial stability
in China (RBA 2023).

Urban residential construction’s contribution
to overall steel demand in China

The downturn in urban residential construction has reduced the sector’s demand for
steel. Urban residential construction consumed an estimated 296 million tonnes of steel
at its peak in 2019 – 31 per cent of all steel used domestically in China
(Graph 2; see Box A for details on the steel demand
estimates). In 2023, the sector is estimated to have used less than half of that amount.
Despite this, overall demand for steel in China has remained resilient, due mainly to strong
growth in both infrastructure and manufacturing investment.

Graph 2



Graph 2: A line column graph showing two estimates of annual steel demand in China. The bars show steel demand estimates based on output in steel-using sectors and the line shows an alternative measure based on steel production in China adjusted for net exports and the change in inventories. Both estimates are close and increased until 2020. Since then, both have declined, but not by much. This is because the large decline in the contribution to steel demand from residential investment has been offset by growing contributions from infrastructure and manufacturing investment.

In the near term, it is likely that infrastructure and manufacturing investment will continue
to grow, with the support of fiscal and preferential lending policy measures. But in the
longer term, headwinds to investment growth in these sectors from high levels of government
debt, a declining population and a slowing rate of industrialisation mean that demand for
steel from these sectors may grow more slowly or even decline. As a result, the longer term
outlook for urban residential construction in China remains important to the outlook for
Chinese steel demand and, in turn, Australian exports of iron ore to China.

Projecting urban residential construction to 2050

To assess the longer term outlook for urban residential construction, and therefore its
longer term contribution to steel demand, I project underlying demand for urban residential
construction to 2050 following the approach of Berkelmans and Wang (2012). The projection is
produced using new data and assumptions, as well as a new approach to estimating
demolitions.

The projection is produced in two steps:

  1. I estimate the future size of the urban housing stock in each year using projections of
    total population, the share of the population living in urban areas, and urban housing
    floor area per capita. In equation form:


    urban housing stock t = total population t
    ×   urban population share t
    ×   urban housing floor area per capita t

  2. I estimate demand for new construction in any given year as the difference between the
    housing stock in consecutive periods plus an estimate of housing that will be
    demolished. In equation form:


    urban residential construction t = urban housing stock t
      urban housing stock t 1
    +   demolitions t

The assumptions for the key variables are:

  • a decrease in total population to 1.3 billion people by 2050 and an increase in the
    urban share of the population to 80 per cent, consistent with United Nations
    (UN) projections
  • an increase in urban housing floor area per capita to 43 square metres; by
    comparison, this is midway between the current levels in Japan and Germany
  • a demolition rate of 1.5 per cent in 2015 falling to 0.5 per cent in
    2050 based on demolition estimates from Chinese census data. These rates are
    considerably lower than those assumed in Berkelmans and Wang (2012).

Details on how these assumptions were determined are given in Appendix A.

Projection results

Based on the projection results, urban residential construction in China has already peaked,
and construction will decline over the medium-to-long term. These results are similar to
those found by Berkelmans and Wang (2012), with higher assumed growth in floor area per
capita offsetting a lower assumed demolition rate (Graph 3).

Graph 3



Graph 3: A line, column and dot graph. The line shows projections of underlying demand for urban residential construction in China between 2016 and 2050 and the columns show contributions to this from population growth, urbanization, growth in floor area per capita and replacing demolished dwellings. The line shows total projected demand peaked in 2016 and will decline to less than one-third of recent levels by 2050. Replacing demolished dwellings and growth in floor area per capita will be the main contributors, as the contribution from urbanisation slows and falling population detracts from demand. The dots show estimates of actual construction volumes up to 2023. These were close to estimated demand up to 2022, but since then have fallen much lower.

That said, the projection implies that construction should eventually recover from its
current low levels, as estimated completions have significantly undershot estimates of
underlying housing demand.
However, the timing of this recovery will depend on how quickly developers can resolve their
debt and funding challenges, and when demand for housing recovers.

Scenario analysis

I test the sensitivity of the projection to two assumptions. The downside scenario assumes a
portion of the existing vacant stock of housing becomes occupied, thus reducing the need for
new construction even further. And the upside scenario assumes a higher average demolition
rate, given the uncertainty around estimating this variable.

The main downside risk to the baseline projection, which assumes that the stock of vacant
housing is unchanged, comes from the possibility of a large reduction in vacant housing.
Developers in China hold large stocks of finished-but-unsold housing, and many households
own unoccupied housing (Glaeser et al 2017). Since the baseline projection
relies on estimates of occupied rather than total housing, a drawdown of developer
inventory, or sales of unoccupied housing to owner-occupiers, would imply less construction
than in the baseline projection for an equivalent level of demand.

Based on estimates of the owned-but-unoccupied stock and developer inventory, the vacancy
rate for 2022 was around one-quarter of the total housing stock. Assuming
that the vacancy rate instead declines to 10 per cent of the housing stock by 2050
− which is comparable with current vacancy rates for many advanced countries –
results in a material reduction in the projected volume of new construction by 2050 (‘less
vacant housing’ line in Graph 4). This is because a larger share of future demand
for housing would be met by existing stock in such a scenario.

Graph 4



Graph 4: A line graph showing three projection scenarios for underlying demand for urban residential construction between 2016 and 2050. Demand by 2050 will be much lower than in recent years by 2050, but the magnitude of the decline is sensitive to assumptions. Where the vacancy rate is assumed to fall, demand for housing will be lower. If the demolition rate is assumed to be higher, the decline will be slower.

I also test the sensitivity of the projection to the assumed demolition rate, as this is the
least certain of the assumptions. In this upside scenario, the demolition rate is assumed to
fall from 1.5 per cent to only 1 per cent by 2050. Relative to the
baseline, there is little difference in the near term. But by the end of the horizon there
is a more pronounced difference, with projected construction significantly higher at almost
700 million square meters in 2050 (‘higher demolition rate’ line in Graph 4).

Implications for steel demand in China

Liaison conducted by the RBA’s Beijing Office suggests that urban residential property
construction in China uses an average of 1.5 tonnes of steel per 10 square metres
built. The baseline scenario therefore implies that annual steel demand from residential
construction in China will decline to 58 million tons in 2050 (though this figure could
be as low as 30 million tons under the lower vacancy rate scenario or as high as 99 million
tons assuming a higher demolition rate) compared with 296 million tons in 2019 (Graph 5).

Graph 5



Graph 5: A line column graph showing two estimates of annual steel demand in China. The bars show steel demand estimates based on output in steel-using sectors and the line shows an alternative measure based on steel production in China adjusted for net exports and the change in inventories. Both estimates are close and increased until 2020. Since then, both have declined, but not by much. This is because the large decline in the contribution to steel demand from residential investment has been offset by growing contributions from infrastructure and manufacturing investment. Beyond 2023, estimates of demand for steel from residential investment are shown. This contribution rises a little from current levels by 2030, but then declines to around a quarter of its 2019 peak by 2050.

The weak long-term outlook for steel demand from urban residential construction is consistent
with the RBA’s previous assessment that growth in overall Chinese steel demand is
likely to slow in the future and may be near its peak (RBA 2017). This outlook factors in
slowing steel demand from residential construction, as well as headwinds to the longer term
outlook for manufacturing and infrastructure investment, which are other important sources
of steel demand. Slowing overall steel demand in China could weigh on global demand for iron
ore and, all else equal, its price.

Conclusion

Weakness in the Chinese urban residential construction sector has persisted since 2021, and
has significantly reduced the sector’s demand for steel. However, overall demand for
steel has remained resilient due to recent growth in infrastructure and manufacturing
investment. Investment growth in these sectors looks set to continue in the near term, but
there is considerable uncertainty around the long-term outlook for such investment. This
uncertainty means the outlook for urban residential investment remains a key risk to the
outlook for Chinese steel demand.

Projections to 2050 indicate that demand for urban residential construction in China has
likely peaked. While some recovery in construction activity is likely in the near term (as
current levels of construction have fallen below those estimates of demand), urban
residential construction will likely continue to weigh on overall demand for steel in China.

Box A: Chinese steel
demand estimates

By Tekla Bastian*

The steel demand estimates shown in Graph 2 are based on estimates of output and
assumptions about how steel-intensive production is for a range of sectors in China. The
estimates of steel demand currently incorporate data and assumptions for 13 infrastructure
sectors, manufacturing investment, residential and non-residential real estate
investment, and the production of 34 industrial outputs including ships, cars,
whitegoods, rolling stock and heavy machinery.

The assumptions of steel intensity used to produce the estimates depend on how outputs
are measured:

  • For sectors where the outputs are measured as volumes produced (e.g.
    the number of cars), the average weight of the product and the steel share by weight
    are assumed. Together, these give an estimate of how much steel is used per unit
    produced, and when multiplied by the number of units produced, this gives an
    estimate of the steel required to produce that output. These assumptions are more
    exact for some products than others (mainly depending on how uniform the produced
    outputs are).
  • For sectors where expenditure is measured, assumptions are made about
    the share of steel in that spending. For example, 20 tonnes of steel is assumed
    to be used for every million yuan of spending on highway investment. This
    corresponds to around 8 per cent of spending. These assumptions are based
    on estimates from industry liaison, but are likely to be less precise than
    assumptions for production-based estimates of steel demand given how broad the
    categories of expenditure are.
  • For real estate investment, 0.15 tonnes of steel is assumed to be used for
    every 1,000 square metres of construction. This is also based on industry
    estimates.

Since 2015, these estimates of steel demand have been comparable to an alternative
estimate of Chinese steel demand (‘total’ line in Graph 2), which is
calculated by subtracting net exports and the change in steel inventories from Chinese
steel production. Remaining data gaps include the defence sector and machinery
production where data are limited, and imperfect assumptions about steel intensity are a
likely source of error in both directions.

*Tekla Bastian undertook the work behind the steel demand model used in these
estimates while in Economic Analysis Department. If referencing this steel demand model,
please use the following attribution:
Bastian T (2024), ‘Box A: Chinese
Steel Demand Estimates’, RBA Bulletin, April.


Appendix A: Urban residential
construction projection assumptions

Urban population

The projection for China’s population is based on the UN’s medium scenario
projection from its World Population Prospects (2022), while the projection for the
urban share of the population is based on the projection from the UN’s World
Urbanization Prospects (UN 2018; UN 2022) (Graph A1). Both measures have been
adjusted slightly to align with official population estimates from China’s National
Bureau of Statistics (NBS) up to 2023, which have been slightly lower than the UN’s
projections in recent years.

Graph A1



Graph A1: A two-panel line graph showing China’s total population and the share living in urban areas. Each shows estimates up to 2023 and projections thereafter. Total population has peaked and is projected to decline from around 1.4 billion to 1.3 billion by 2050. The urban share of the population is projected to increase from its current level of around 65 per cent to 80 per cent by 2050.

A material share of measured urbanisation in China in recent years has come from
reclassifying communities on the periphery of major cities as urban rather than rural.
This means residents of these communities are already housed when they are reclassified
as urban residents. However, since most of these households live in low quality rural
housing, they will still contribute to demand for new improved housing (Gan et
al
2019).

Housing floor area per capita

Housing floor area per capita is an indicator of housing consumption, and it typically
increases with household income (Berkelmans and Wang 2012). Floor area per capita could
increase as a result of households either growing smaller and/or living in larger homes.

I project floor area per capita by comparing current estimates for China against those
for a selection of other countries at a more advanced stage of development. By applying
judgement and taking into account differences across measures for different countries, I
assume that urban floor area per capita for China in 2050 will reach 43 square
metres per person.
This is between the current levels in Japan (where housing is small due to severe
geographical constraints) and Germany (where housing is larger due to a more dispersed
population, but not as large as in Canada where most households live in detached houses)
(Graph A2).

Graph A2



Graph A2: A line graph showing housing floor area per capita for China as well as Japan, Germany and Canada. China’s projected floor area per capita between 2021 and 2050 is also shown. China currently has the lowest floor area per capita among the countries shown. By 2050, its floor area per capita is expected to grow to between the current levels in Japan and Germany.

The Chinese data on floor area per capita measure only lived-in housing. As a result, the
projections are sensitive to the quantity of vacant housing in China, and how much of it
is sold to satisfy demand in the future. The baseline projection for residential
construction demand assumes the stock of vacant housing does not change over the
forecast period. But I also consider a scenario where the estimated share of vacant
housing declines over time to levels that are similar to advanced economies today.

Demolitions

Some percentage of the housing stock is demolished every year, which will add to the
construction that would otherwise be required to meet overall housing demand. Previous
attempts to estimate demolitions have produced a wide range of results. For example,
Berkelmans and Wang (2012) assumed a demolition rate that fell from 4.5 per cent
in 2010 to 2 per cent by 2030, while Rogoff and Yang (2022) assumed a rate
averaging 1.4 per cent.

The work presented in this article uses a novel approach: inferring demolition from
changes in the age distribution of the housing stock from census data. More
specifically, I start by observing the stock of occupied housing that was constructed in
different year ranges in both 2010 and 2020. For all year ranges prior to 2000, I assume
that any declines in the occupier housing stock over that period measure the number of
dwellings demolished. Older housing in China tends to be lower quality and have a
relatively short lifespan, so I assume that most are demolished rather than simply
vacated and, for example, held as an investment. This assumption is consistent with
estimates of building lifespan in China that are as low as 25 years (Wang, Zhang
and Wang 2018). This approach suggests around 14 per cent of 2010’s
occupied urban housing stock was demolished by 2020 (Graph A3). In annual terms,
this averages around 1.5 per cent each year.

Graph A3



Graph A3: A column graph showing the share of the 2010 occupied housing stock estimated to have been demolished by 2020. Estimates are given for different periods of construction. Older housing is more likely to have been demolished than newer housing. Overall, around 14 per cent of the 2010 housing stock is shown as demolished by 2020.

The estimates are lower than those used in previous work, but closer to the rates
observed in other countries (Graph A4). Indeed, demolition rates in advanced
economies are even lower than the estimate for China, though this is to be expected
given the higher average quality of housing in advanced economies.

Graph A4



Graph A4: A line graph showing housing demolition rates for Australia, Japan, Spain, Taiwan and Hong Kong. In all countries, the rate is below 0.5 per cent, which is much lower than the estimates for China used in this article.

I assume the demolition rate falls from 1.5 per cent in 2015 to 0.5 per cent
by 2050 as the share of new higher quality housing increases. This is roughly equivalent
to the demolition rate for Hong Kong in 1990. I also consider an upside scenario where
the assumed demolition rate falls to only 1 per cent by 2050.





References

Berkelmans L and H Wang (2012), ‘Chinese
Urban Residential Construction to 2040
’, RBA Research Discussion Paper
2012-04.

Gan L, Q He, R Si and D Yi (2019), ‘Relocating or Redefined: A New Perspective
on Urbanization in China’, National Bureau of Economic Research Working Paper
No 26585.

Glaeser E, W Huang, Y Ma and A Shleifer (2017), ‘A Real Estate Boom with Chinese
Characteristics’, Journal of Economic Perspectives, 31(1), pp 93–116.

Hendy P (2022), ‘Evolving
Financial Stress in China’s Property Development Sector
’, RBA Bulletin,
September.

Kemp J, A Suthakar and T Williams (2020), ‘China’s
Residential Property Sector
’, RBA Bulletin, June.

RBA (Reserve Bank of Australia) (2017), ‘Box A:
The Chinese Steel Market and Demand for Bulk Commodities
’, Statement
on Monetary Policy
, November.

RBA (2023), ‘Focus
Topic 5.1: Vulnerabilities in China’s Financial System
’, Financial
Stability Review
, October.

Rogoff K and Y Yang (2022), ‘A Tale of Tier 3 Cities’, International
Monetary Fund Working Paper No 2022/196.

United Nations, Department of Economic and Social Affairs, Population Division
(2018), World Urbanization Prospects: The 2018 Revision, Online
Edition.

United Nations, Department of Economic and Social Affairs, Population Division
(2022), World Population Prospects 2022, Online Edition.

Wang J, Y Zhang and Y Wang (2018), ‘Environmental Impacts of Short Building
Lifespans in China Considering Time Value’, Journal of Cleaner
Production
, 203, pp 696–707.




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