Warning: This little essay is qualitatively different from our usual fare. It deals with (ugh) economics. It may not be appropriate for people who cannot abide what Thomas Carlyle termed “the dismal science”.:)
Recently, a friend wrote to us asking for our reaction to a story on “60 Minutes” that described the housing situation in China, particularly the cost of housing, the over-building of housing, and the incongruity of rising housing prices in the face of large numbers of new apartment buildings standing empty.
Unencumbered by having seen the program and in lieu of true research on this topic, we prepared a response based on our observations of living in China. Here (slightly edited) is what we said:
As we understand it, your questions were prompted by a “60 Minutes” program that reported on large apartment buildings in China that are standing empty. We did not see the program, but we know that there are many things going on that affect housing in China. Here is a sample of relevant data.
1. The Chinese are becoming wealthier. Not everyone is getting equally wealthy, nor are they all getting wealthy at the same time. In any case, to a surprising (to us) degree, there are an increasing number of Chinese with considerable amounts of money.
2. Whereas Chinese used to yearn for a motor scooter and an air-conditioner (to replace their bicycle and fan), they are now buying automobiles and “houses” ; i.e., condominium-like apartments.
3. The national plan is to move more than 100,000,000 people from the countryside into the cities over the next 10 years. (That’s equal to about a third of the US population.) These folks will need somewhere to live.
4. It is not the Chinese custom to buy “used goods”. Therefore, previously used housing stock is being refurbished by current residents, and they are not so often being re-sold to strangers. So, this means that there will be a great need for new housing in urban areas.
5. Chinese savings interest rates in banks are even lower than they are here in the US. Investing in the stock market has not worked out for many unsophisticated Chinese savers. So they are looking for some place safe to put their money. By the way, Chinese save 40-50% of the money they earn; this compares to about 5% for Americans.
6. The housing market over the past 10 years has been torrid. Prices of houses have increased 3-5 fold (and more) in places where we have lived. Many Chinese see that the housing market is a place to watch their money grow. (Sound familiar? Think USA circa 2007.)
7. Many Chinese have bought several houses. (We had a friend who bought 10 such houses, living in one, renting two others, and leaving the rest empty -- satisfied to let them stand as a speculative investment; i.e., a “nest egg”.
8. A new house in China is not only unfurnished; it is unfinished. To make the bare concrete interior habitable, one is looking at another major expense, beyond the bare purchase price of the home. Therefore, many owners decide to let the houses stand unfinished and empty, while the market price continues to rise
9. Local governments have been concerned about the possibility of a “housing bubble” and, during the last few years, have taken steps to reign in the rampant speculation. Among other measures, they limit -- on paper, anyway -- a person to two or three homes, and they have increased the down payment requirements.
10. The policies have begun to work. In general, housing prices are not rising as fast as they once did In some cases, the prices have actually fallen.
11. As a result, the savvy home buyer of today is thinking, “If I wait a little longer, maybe the price will come down even more.” Therefore, not as many purchases are being made -- with the obvious result that there are more units on the market.
12. People who did buy in the hey-day of the market (just a few years ago), however, are worried. Some of them are already “underwater”; i.e., owing more on their homes than the homes are worth in today’s market. Homebuilders are complaining. Laborers are losing their jobs. (Does this sound familiar? Think US circa 2009)
13. As a result, the governments whose speculation-dampening policies are having their intended effect of cooling the market are now talking out of the other side of their mouths (Sound familiar?) about the possible need to stimulate the housing market. For example, it has long been the case in China that you cannot buy a house in a city unless you have a certificate that gives you the right to live in that city. When a person is born, he/she gets a certificate to live in that town. If the person grows up and gets a good education, a hi-tech company, for example, can help the person can get a certificate to live and work in another town where the job is located. In that case, the new employee can buy a house in the new city. Today, in order to stimulate the housing market further, some cities are removing the requirement that a buyer needs to have a certificate in order to buy a home there. Some are even giving the buyer a certificate, as an added inducement, when a person buys a house in the new city.
14. As is true in any speculative market, there is a tendency to over-produce and/or to produce in the wrong place or at the wrong time. That is, some builders are legitimately going bust.
15. However, the long-term (e.g., the 10-20 year) view for the housing market in China is pretty upbeat. First, you have people with more money. Second, you have a movement of 100,000,000 people coming into the market. Third, you have a government that is trying to ignite domestic consumption as a way to move the national economy away from one that is dependent on exports and foreign investment to an economy that rests on domestic activity; e.g., the US where more than 60% if the economy is generated by home-grown American consumption. [Frankly, it stuns us to consider the impact of 1.4 billion Chinese living the affluent, consumptive -- if not profligate -- lifestyle that we enjoy in the US. It’s not clear that the good Earth -- with direct reference to Pearl Buck intended -- could take it.]
At least, that’s our take on the matter. . .for now.:)
-Donald and Karen Barnes