China Housing Prices. Everything Is Relative.

Dan,
You’re exactly right of course. This website has some really interesting and easy to use data on housing affordability index for a lot of cities, including several in China: http://www.numbeo.com/property-investment/rankings.jsp
The two best bits of data are the price / income ratio, and the affordability index – a lower index means less affordable. Some sample data (housing affordability indexes):
Jacksonville, FL: 9.92
Los Angeles: 2.87
New York: 1.21
Sydney: 1.02
Beijing: 0.49
Shanghai: 0.32
Islamabad: 0.10

I have lived in China for over 12 years. About 5 years ago I bought two properties; one in Beijing and one in Chengdu. Being a westerner, I bought higher end properties to suit my living preferences. Over this time, these properties have tripled in value and I have Chinese people (albeit comparatively rich Chinese) contact me all the time asking if I want to sell. So, to answer your question, from an investment standpoint, you probably should have bought the Qingdao property “many years ago.”

If you took the $550 rental price per month and used that as a proxy loan payment at 5% for 30 years, you get $102k. That tells you the market is out of whack.

Everyone knows the prices are too high and they have already started to fall and they will continue to do so. What I find funny are all the foreigners who bought their condo four years ago for $400,000 who now claim they are worth $600,000. They are wrong though because they are comparing them to new. What nobody tells you (and nobody told me either and I paid the price) is that the market for used condos is very limited because everyone wants new. I bought my condo brand new in Shanghai in 2003 for $275,000 and when it was time for me to sell it in 2007 (before the prices fell), everyone told me I could easily get $400,000 for it. Guess what, I got $285,000. Talk to those of us who have actually bought and sold and you will find out that the market isn’t as it appears.

There’s a wrinkle to all of this. Before the 1990′s, all housing was owned by the state, and as part of a series of reforms in the 1990′s, most urban families got title to their apartments. Which means that anyone that was lucky enough to get their apartment, now has an high priced apartment with no rent or mortgage.
The other thing about the Chinese real estate market is that prices are high, but rents are extremely low. Most young workers have zero change of buying an apartment, and the expectation is that they are going to rent for the rest of their lives (unless they inherit their parents property), and so rents on apartments tend to be very, very low.
Harris: And whenever I would ask one of the senior lawyers in Qingdao who can afford condos like this, they would pretty much just shrug. I always had the sense that a huge swath of these condos were owned by Singaporeans, Hong Kongers and ultra-wealthy mainlanders, all for investment purposes
It’s not just ultra-wealthy. What often happens is that you have a middle class family got deeded an apartment in the mid-1990′s. Because rents are very low, it makes doesn’t make any sense to live in that apartment but to rent somewhere else. Once you’ve saved some money, you can sell your old empty apartment, and buy a new better empty apartment. Also, Chinese families will often pool their savings, so you have large amounts of cash that get used to buy an empty apartment.
One way of thinking about this is that in the old days people used to keep their money in gold. Today people in China, keep their money in empty concrete shells. There are some reasons that people do this. Suppose I go and buy some stock in the Chinese stock market. I have no clue what the person is doing with my money. Now I buy an apartment. I can go to the apartment and see that it’s there. I can sleep in it for a few weeks to make sure that no one else shows up claiming to own the apartment.
The other big buyers of apartments are companies. Housing prices being what they are, company supplied housing is a fringe benefit and sometimes an essential one. All of those peasant workers working in Guangdong invariably live in company housing, because they couldn’t possibly afford to buy their own house.
Maurice: And what if after 10 years the government decides to destroy your property to make room for a new project?
You are legally required to get compensation and sometimes it’s a good thing. I know of someone that got an apartment from his old state-owned enterprise. It was built a long time ago, and had a lot of sentimental value. Local government decides to tear it down, but in exchange they got a new apartment in the new building. It didn’t cost the government anything, and the owner was quite happy.

My Chinese friends say that their only option is investing in Chinese real estate because the Chinese government makes it very difficult to invest their money overseas. It’s the only way they can beat inflation.
I don’t think many of them are from HK or Singapore. As a foreigner, you have other options with your money. Why take the chance that the government will demolish the property?

A software engineer that works in a Western company in China is likely to make about 75% of what a comparable engineer would make in the US. Starting salary for a EE in the US is about 70K. Salary for an EE with either an American graduate degree or a big name Chinese school (i.e. Qinghua or Beida) is probably about 50K. (Note the conditions. If your degree isn’t a big name or if you don’t have US PR, your salary is going to be a lot lower.)
If you think about those numbers they explain a lot (like why Americans go to law school and Chinese get EE’s). One difference between law and EE is that with law you are dealing with a local market, whereas with EE’s, you have a global market. Being licensed to practice law in China doesn’t help you in the US and vice versa, whereas global high technology companies have to pay somewhat comparable salaries between US and China to get people to move from the US to China.
One other number
population of Seattle: 600,000
population of Qingdao: 8.7 million total. 4.5 million in the urban areas
Also a fresh-out-of-school Chinese lawyer is different from a fresh-out-of-school US lawyer. Chinese lawyers are more comparable to US paralegals than lawyers. US lawyer is a three year masters program, whereas Chinese law school is a three year undergrad program, and there is no requirement in China that you have to attend law school to take the law exam, you just have to have an undergraduate degree in something.

Yes,Twofish, China cannot be called a poor country because it has people who are poor, people who are rich, and people who are in the middle. We need to be more nuanced. In that sense China is wholly unlike every other country in the world, in which every one has exactly the same average income.
What a bunch of nonsense. China is one of the poorest countries in the world, and the US nearly the richest (and yes, like China, the US has people who are much richer than average, much poorer than average, and everything in the middle). Rather than compare Chinese housing costs with those of the US, why is it so hard to compare then with, say, those of Indonesia, Thailand, Mexico and even Greece? All of them have higher per capita GDP than China but at least they are more in line with that of China’s, and this doesn’t even consider the fact that household income in China is abnormally low relative to GDP compared to other countries, so people are even poorer than the per capital GDP numbers imply.
Real estate prices have soared uncontrollably in China and the government is terrified of seeing them collapse because local governments rely heavily on rising prices to fund their extravagances. We have seen soaring real estate prices many times before in history and we always know how it ends. It is silly to see what weird intellectual gyrations people take to insist that this time is different. It kinda reminds me of Japan in the late 1980s (hey, come to think of it, another country in which not everyone had exactly the same income level!) when people with a straight face could tell you the reason the Japanese bubble would never deflate was because japan is an island, and, well, don’t you know, islands have limited amounts of land. How absurd.

@Twofish – I think you’re a very smart guy with a world of insight into the way modern China works . . . . . . . which is why it hurts to see you talking crazy like this.
When I see a graph showing real estate prices in China as roughly equivalent to those in the US, my first instinct is to check whether the data is wrong. In this case, they are comparing Chinese averages with US medians, something which seems somewhat dubious if you ask me – could it be that Chinese average is missing out the lowest-priced housing? Or is the average price in the US much higher than the median? I don’t know, but I don’t like comparing apples with oranges like this.
But OK, let’s assume that if we were to compare like with like we would end up with the same story. If this was the case, then the Chinese market is mos def over priced by a million miles.
Put simply, the purpose of real-estate is to be used, either by others who pay you for the privelege, or by yourself (in which case you save money by not having to rent off others). If a piece of real-estate would take roughly 35 years of rent to buy, then it stands only a small chance of making back the asking price within its expected lifetime, and is therefore a money-loser.
If real-estate is being used in place of other investments, then this means several things:
- Capital which would otherwise be productively invested is being invested unproductively.
- Capital is being invested in real-estate which will rapidly flow into other markets once those markets become available.
- There is a extreme lack of trust in financial insitutions and their regulators in China.
- Capital is being invested based on a promise of ever increasing prices, which in turn is based on the promise of continued rapidly increasing income. Presently, real-estate prices are falling, and the six-year forecast is that growth will slow to 3.5% GDP growth per annum. The basis on which people are investing in real-estate thefore appears less than entirely solid.
Basically, none of this looks good.
I also see people above talking about how this shows the effect of globalisation on the real-estate market. I’m afraid this is rather optimistic. The figures quoted for the Chinese cities are averages, presumably for the entire city – this means that the average for Shanghai includes not only the area of the old French Concession, but also the ricketty slums one finds down by the Xuzhou Creek. Similarly, the average for Beijing includes not only Haidian, but also the places out by the 5th ring-road. We are not comparing Manhattan with The Bund here, but the entirety of each city. Even this ignores the basic fact that the jet-setting crew are very, very thin on the ground even in Shanghai – China’s movingest and shakingest city.
Yes, it does seem like ol’ Dan lost out on not buying that condo – but I certainly wouldn’t advise him to buy it now.

Dan – You may have already seen this, but Patrick Chovanec has a great post on his most recent data mining on the topic of China’s real estate market: http://chovanec.wordpress.com/2011/12/12/china-data-part-1-real-estate-downturn/
I’m reminded of something I read while in Wenzhou recently. A SME owner made the comment that he didn’t see the point trying to stay in business any longer because his wife had made as much money on a couple of real estate transactions that he had made in almost a decade of owning his business. Call it what you want, but that’s a bubble!

The big problem with benchmarking prices with the affordability ratio in China is that we do not actually know what incomes are. We only know what the official statistics are, but that does not include incomes from all sorts of sources that go unrecorded. This under reporting of incomes is probably in the region of 30 to 50%, some suggest it is as high as 100%.
By the same affordability measure, there wouldn’t be as many Bentleys, Ferraris, Land Rovers or much else on the roads as there are. The answer is there on the streets for all to see so don’t be misled by data.
Real estate markets in China are in the process of restructuring and we will move from capital appreciation led markets to yield driven in the coming years. This will result in a more ‘developed market’ type structure to pricing which will seem more rational to outsiders. Remember the rationale for investing in housing in China has been to sell at a higher price later rather than go to the trouble of collecting rent.

Part of the reason people invest in real estate is because of past history. In 1945, if you had money in Shanghai real estate, you would have done better than any other Chinese investment. If you had stocks or bonds, they would be worthless. If you had gold or jewelry, the Red Guards would have taken it. If you have money in real estate, the government would have seized it in the 1950′s and 1960′s, but you would have gotten compensation in the 1980′s. Now if you can survive the Great Leap Forward, the Cultural Revolution, and all hell breaking loose, and still manage to have something, that seems like a reasonable investment.
BC: Real estate prices have soared uncontrollably in China and the government is terrified of seeing them collapse because local governments rely heavily on rising prices to fund their extravagances.
No. The central government is forcing prices down. Also local governments like high real estate prices because it gives them financial independence, but when prices go down, they go bankrupt at which point they have to “go to daddy” for a bailout. The central government will bail out local governments, but there will be lots of strings attached. Looking at local governments it’s a lot like a teenager with their dad’s credit card. Daddy will pay, but there will be consequences.
What the central government is doing is counting the number of protesters and annoyed people. When property prices go up, there are a lot of annoyed people. When property prices go down, there are a lot of annoyed people. The government is trying to minimize the number of annoyed people.
BC: We have seen soaring real estate prices many times before in history and we always know how it ends. It is silly to see what weird intellectual gyrations people take to insist that this time is different. It kinda reminds me of Japan in the late 1980s
This kinda of reminds of China in 2006 and 2003, and 1999, and 1996, and 1993, and 1989, and 1987, and 1983. I hear that there is smog in Beijing, must be the end of the world.
BC: We have seen soaring real estate prices many times before in history and we always know how it ends.
Yes. You have a real estate crash every few years in China. What happens is that prices go up too high so that the government has to crash the economy in keep inflation from going out of control. This lasts for a few months, after which it goes too far, and then the government pumps credit back into the Chinese economy.
Now, if anyone can explain to me why *this time it is different* and why the government can’t do what it did in 2006 and 2003, and 1999, and 1996, and 1993, and 1989, and 1987, and 1983. It’ be quite interested. Among those crashes, there was only one time (1989) when things came anywhere close to collapse.

FOARP writes: “We are not comparing Manhattan with The Bund here, but the entirety of each city. Even this ignores the basic fact that the jet-setting crew are very, very thin on the ground even in Shanghai – China’s movingest and shakingest city.”
Yeah, that’s true. On the other hand, using an average instead of a median figure gives a lot more weight to the Bund than to the property along the creek. In any event I’m not arguing that jet-setting individuals are doing all the buying. I’m just saying that there is a huge amount of pent-up foreign currency earnings running around in China looking for a place to land. That money can buy real estate in the U.S. or Europe or in Shanghai or Beijing. So I think, to an extent, it’s a natural think for the real estate prices in those cities to level off at prices near those overseas cities. If you’re looking for a place to buy real estate as an investment, it’s kind of an international market, and you want to choose a city with a promising business / economic future, and I think Shanghai fits the bill as well as NY at this point. That’s all. I realize that can’t explain everything about the soaring prices across the country…
-LH

@Twofish -
” In 1945, if you had money in Shanghai real estate, you would have done better than any other Chinese investment.”
Better than any other mainland Chinese investment, maybe. I people (not just foreigners) who had their property confiscated in back ’49, with no sign of any compensation ever being paid whilst the present government stays in power. A much better investment is the one that thousands of Shanghainese did make, which was a one-way ticket to Hong Kong or where-ever.
I guess this is all becoming ancient history though.
All I can say is that our out-looks are affected by the people you know. Most of the people I knew investing in real estate in China were either locals with low incomes but access to cheap credit through connection, or HKers/Taiwanese momentum-trading on ever increasing real-estate prices by buying one day and selling the next. I just don’t trust that kind of market.
@LH -
” it’s a natural think for the real estate prices in those cities to level off at prices near those overseas cities.”
I doubt this. There’s several reasons why:
1) The real-estate itself:
- Is the build quality the same on average? I think the most generous judge would have to say no to this.
- Location, location, location. I love China, but I know that I never want to live in Beijing because of the oppressive smog. Is LA worse? Don’t know, never been there – but the stats say it’s better.
2) The actual rights that come with ownership. Put simply, China still does not have outright ownership of property. Sure, they’ve made some moves in this direction, but not all the way there yet.
3) Stability.
4) Motive: people don’t come to China to spend the same money they would elsewhere, they come to bargain-hunt.
So even if we imagine a clued-up set of international investors, given the pick between buying in Shanghai, Beijing, London, New York, and Tokyo, they should not be paying even nearly the same prices for Chinese real-estate as they are for American.
Either the stats shown are wildly missleading, or the markets are messed up.

@FOARP:
you might be right, the things you say about the real-estate strike me as true by and large. Well, I don’t know about the building quality. I’m not especially impressed with the quality of American housing, and the buildings where I’ve owned property in China strike me as pretty well put together, but it’s a little hard to make an apples-to-apples comparison. People paid exorbitant prices for mcmansions all over the U.S., and I could only shake my head at the wood framing and overall quality of the houses. I feel the same way — even more so — about the condos I’ve seen in California. I would much rather buy in a steel-reinforced-concrete building than a wood framed multifamily condo. But still, I see what you mean.
But stepping back, everything in China at the upper-middle income level is trending toward overseas pricing: wages, technology, cars, food, etc. Why would housing be exempt from this trend in pricing? Surely the fact that land is at more of a premium in China than in the U.S. should exert some upward pressure on real estate prices as well.
I would love to own a property in NYC except for the small detail that the economy is in the toilet. I suppose that doesn’t matter to someone who is working only with cash savings and doesn’t care about current income, but for lots of others, the choice of a business center to live in has some to connection to the, you know, business.
The lack of outright ownership is huge of course. I’m not sure what effect that has on the market. It seems to me that it means that buyers figure out at the time of purchase how long they can safely hold a property and plan to sell in advance of what they see as a possible timeframe for seizure / demolition. It’s true that this is a real wild card. My impression is that it has not impacted the upper end of the real-estate market in China much, at least not yet.
-LH

@Angela Zhang -
“Those that bought in China got rich off their investments.
Only if they’ve managed to collect their profits, and then managed to put their money into something else. Otherwise they’ve only “got rich” in the sense that they hold an asset whose value has increased – a nice situation, but not “getting rich”. Suppose I’d bought stock in a clutch of dot coms in 1998, and then just held on to the stock – would I have been rich in 2000? And would I be rich now?
“Those that didn’t lost out. Deal with it instead of whingeing.”
Like I said above, ol’ Dan missed a trick by not buying early in the last decade and then selling later. However, we’re talking about whether it’s a wise investment in the here and now.
“Who here on this blog not in China can actually afford to buy there now? Very few I bet.”
Firstly, let’s assume you’re right and that the commenters here – a bunch of mostly fairly well-off, mostly western or western-educated, mostly professionals – are not rich enough to buy real-estate in China. If this was true, wouldn’t it be a massive, glaring warning sign that something is deeply wrong if even well-off expats/returnees cannot afford real-estate in China?
Secondly, you are of course wrong. Even a fairly modest western income is enough to buy real-estate in, say, QiaoTou in the country outside Nanjing (if they’re allowed to buy there, that is). It’s the in-city prices that have gone crazy.
Finally, I have to say your comment is an example of what concerns me about the people investing in Chinese real estate. It often represents an all-in investment of the entirety of a family’s wealth on the basic assumption that prices will rise forever and that each piece of real-estate is a magic money-printing machine, regardless of whether this is backed up by any fundamentals. The sensitivity with which people react when doubt is cast of the wiseness of such investments reflects an emotional commitment not conducive to logical decision-making. It makes me think that the level of commitment is such that people will stay-in way past the point when cooler heads would advise an exit.
But hey, most of the people here are legal professionals of one kind or another. They’re job is to be sensitive to risk, and they are not, on the whole, risk-takers.

Hi Matt, It may surprise you to learn that many US houses wouldn’t pass Chinese building codes either. Wood is commonly used in US as part of the structure but wood is not permitted in China as part of the structure, except in a few demonstration cases.
Brick is not a load bearing material in China so I guess you are misunderstanding something here or just exaggerating to make a point. As for 3 inch gaps between bricks, what does the building do? float in the air? Anyway, at least that way you get your ventilation.

@sam. Thanks for the response. From a safety point of view, I don’t have strong feelings about wood v. brick v. concrete construction. They all have their advantages and disadvantages. Properly used, they all seem safe to me.
What do you think is the reasoning behind China forbidding wood? I’d guess it has more to do with conservation than safety, but I’d be genuinely interested to find out.
Brick was being used on a load bearing wall in my apartment. It was even in the plans that we got from our building management office. (I was trying to knock out part of that wall, but couldn’t get approval because of the load.)
The “brick” part wasn’t an issue to me. Brick walls are often used on load bearing structures and would pass US code (link: http://www.advancedflashing.com/clientsuppliedcontent-forms/BIATechNoteTextPDFs/Tech%20Note%2026.pdf ) In my wall, the gaps were between individual bricks on the same horizontal plane. Simply, the builders used the least number of bricks possible when they laid that wall. They mortared the gaps and then applied plaster. We did have great ventilation :)
@LH. Concrete and plaster walls are great for keeping things quiet. I also like the Chinese style of selling empty shells. Those are probably my two favorite features of the Chinese home market.
I wonder about why there are fewer home fires in China. I used to live next to a fire station and I was amazed that I never saw a firetruck rush out their garage. I’d guess that wood frame construction probably isn’t a huge factor. By the time a fire is in the framing, it’s already taken off. Put the same fire in a concrete box and the walls would act like an oven, igniting anything that would burn. My guess would be the lack of fireplaces, candles and other open flames (except for the stove) in Chinese houses. Whatever it is, China seems to be doing something right.

@LH: Good point. I thought about containing the fire within the unit as soon as I hit submit on my post.