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Tuesday, August 9, 2011

Is $125,000 for a residential parking space too much?

The China Daily reported last week on alarm in Chinese cities over high selling prices for parking spaces in residential complexes. The highest reported price was 800,000 yuan (or $125,000) recently for a parking space in an upmarket complex in Beijing. 

Before you get too agitated, let's try to get some perspective.  [And you can play too! Scroll down for a homework exercise.]

The info-graphic is actually a little misleading.  Housing prices are quoted per square metre but parking prices are totals. It would be better to compare housing per square metre with parking per square metre.

To convert, we need to know the total space per parking slot. This can range from about 20 to 38 square metres depending on the layout and the form of the parking. These make a big difference to how much aisle space and space-consuming ramps are needed.

If we need 20 to 38 sq.m per parking spot, maybe it is really NOT so shocking that:

... the average price of a parking space in Xi'an, 170,000 yuan, is 31 times greater than the average square-meter price for residences, by far the biggest differential of seven cities surveyed.
This '31 times' actually means that Xi'an housing and parking are similar in price per square metre. And in the other cities, parking is usually cheaper than housing. For example, if we assume 30 sq.m per parking slot on average, then Nanjing parking is priced at about 4,000 yuan per square metre on average compared with 12,000 per sq.m for housing.

Here is a homework exercise (please share answers in the comments). Next time you see a breathless news report about a sky-high sales price for a parking space, divide by thirty and compare with the price per square metre for real-estate floor space in the area (or divide by 300 and compare with the price per square foot if you must). 

You may ask, why compare the parking prices with the housing prices at all? After all, underground parking can't usually be converted to housing. True. But if the price per square metre of parking rises above that of housing you would expect developers to start building more parking anyway as a profitable venture. So it is worth comparing. And by the way, if the data are reliable, then it looks like Xi'an may already be close to that point. 

Another perspective is based on the cost of construction. From the article:
Zhang, the property market supervisor, said the average construction cost of a regular underground parking space is about 3,000 yuan per square meter. An individual parking space takes up about 38 square meters, accounting for supporting facilities such as ramps and aisles. So the average cost of each parking spot is about 114,000 yuan.
So Zhang seems to be saying that 114,000 yuan would be a reasonable price to charge for a parking slot. But wait a minute. Property prices are a market phenomenon. And parking is being treated more or less like real estate in this situation. So we shouldn't really expect its price to just reflect costs.

Of course, housing and parking prices in China's cities might BOTH be in a bubble! But that is another issue.

Will the price of residential parking just keep rising in Chinese cities? I think not. One reason is that newly increased parking minimums can be expected to gradually increase supply (at least in areas with a lot of new development) and send prices lower if it gets ahead of demand. One source in the article thinks this likely: 
According to national standards, three parking spaces were required to accommodate 10 households in a residential development before 2006. Now, six to eight spaces must be available for every 10 households.

Yu thinks that shortages of parking spaces in residential areas will gradually ease in the future and prices will go down. "Let the market do the adjusting," Yu said.

But even without this government-imposed increase in supply, market forces would also put a lid on prices at some point. At some point, investors would notice if parking is a profitable thing to build. Maybe they already are? If so, expect to see automated parking structures appearing in established neighbourhoods with pricy parking.

On the other hand, this market response will not happen if price controls kick in. China's cities have price controls on other kinds of parking, so they might easily be tempted to impose them here too. Indeed, the article quotes calls for regulation to prevent price escalation.

"It's about time the sale of parking spaces was regulated," said Zhang Jigang, director of property market supervision in Northwest China's Shaanxi province. "Some developers have been making excessive profits and this has affected social stability."
The Shaanxi Housing and Urban-Rural Development Department issued the country's first directive on the sale of parking spaces on June 10. The regulations allow market forces to set prices, but ban overpricing. They also say that the annual increase in prices must be below that for housing.

One final comment. What we are seeing here is unbundled parking. It is actually a very good thing.

1 comment:

  1. Hello Paul,

    As you mentioned, the $ 125k, as well as the other prices for cities in China are extreme. In reality prices are much lower. In general, real estate price reporting tends to be exaggerated.

    For example for Beijing, in many places, even within 2nd and 3rd ring, people pay 300 rmb a month for a fixed parking spot (I pay 500 rmb a month on 4th ring). Again it depends a bit, if there are offices in the area, this price goes up. One of the highest rents I am aware of is 3,000 rmb a month (fixed spot in CBD office building). Then, the 800,000 rmb does not make much sence from a financial perspective.

    In the cities mentioned, the developers treat this as their next easy way to make money. The construction cost of 3,000 rmb / m2 is overstated, 2,000 gets you a long way, especially in the regular buildings (most buildings are marked "high-end" by their developers, a bit of an empty phrase).

    This article seems to be aimed at trying to change the common understanding that parking is free. Until about 3-4 years ago, before the big boom in car growth, this indeed used to be the case.

    With recent parking price increases in Beijing, and other cities following suit, people start to see parking is something you need to pay for. Many people never considered this as a cost and are now caught by it.

    Hopefully there will not be any price control by government. Let the market run its course, it will mature, maybe through a bubble or two, but at least people will learn from it.

    For Beijing I do expect prices to go a bit higher, given the high car ownership (highest in China), the limited amount of spaces available, and the lack of transportation options. However, this will not going to the extremes as the China Daily articles makes people fear.

    As public transportation options (gradually) increase, and real estate as well as economy mature so will the prices of parking spaces.