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China Housing Prices. Everything Is Relative.

Posted in China Business

house.jpgGot the above graph from a China Tells post, entitled, “A Comparison between China and US housing Prices.”  The post seems to make the argument that housing prices in China are not so high, especially when we compare them with those in the United States:

Is China’s housing price expensive? Depends. Expensive is always a relative concept. This chart compares the housing price in a lot of Chinese cities to that of the United States, and it seems that the housing prices in two countries are quite similar. 

Whoa, whoa, whoa. I think this reasoning is horrible. I agree that prices are relative, but what they are really relative to is incomes and on that score there is a huge difference between China and the United States and it is on that score that I have thought China real estate has long been over-priced.

In fact, many years ago, my law firm looked into buying a firm condo in Qingdao, China. At that point, one of our lawyers was living in a very nice condo for which we were paying about $550 a month, nicely furnished, including all utilities, including Internet and cable TV. The cost to buy that condo would have been about $300,000. One of the things that convinced me not to buy was the fact that a similar condo in Seattle would have cost about the same. The difference though is that in Seattle most people with a decent to good job could afford such a condo, but in Qingdao very few could. In Seattle (and I admit that I am speaking totally off the top of my head here), a police officer makes around $80,000 a year and in Qingdao around $4,000.  In Seattle, a school teacher makes around $60,000 and in Qingdao around $4,000. In Seattle, a young lawyer makes around $90,000 and in Qingdao it’s more like $4,000.  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.

Now I know the counter-arguments to the above: that China real estate will always do just fine because real estate has always been viewed as a great investment and it has always been and will always be where Asians want to put their money; that real estate in China has mostly been bought with cash and so is not highly leveraged; and that mainlanders have few other places to put their money. But let me tell you, seeing this chart only reinforces my belief that we were right not to buy that condo in Qingdao.

What do you think?  China real estate, buy or sell?

  • MHB

    Those figures seem really low… 120 sqm in Beijing for a little under $360,000? Triple that?!
    http://www.globalpropertyguide.com/Asia/China/Rental-Yields

  • http://www.eastasiaforum.org Dominic

    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

  • http://www.summitchina.ca Marius

    Dan is right – the Chinese residential market is totally out of control – moreover these high prices have led to a building boom that even here in sedate Nanjing has resulted in a huge oversupply (at current prices, that is – everything is relative as Dan says) witness the empty condos in newly build complexes. It blows your mind.
    So when it comes crashingdown, like with every deflationary price movement, it wil come a-crashing down

    • m1626

      well houses all sold out immediately in Beijing

  • John

    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.”

  • Maurice

    I think another very important factor is that the quality (poor maintenance and poor construction) of the real estate goes down with the years. New condos are often much more expensive in China compared to places that are 20 years old and ready for destruction.
    And what if after 10 years the government decides to destroy your property to make room for a new project?

  • Hua Qiao

    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.

  • Simon

    I agree with you. Housing price is way too high in China. Everyone dreams of becoming rich overnight by investmenting in housing. But one point that is often ignored is that those people are borrowing from the bank to make the investment. Right now, the central gov is reining in the wild investment in the housing market by squeezing the credit spigot. That is why you see a lot of house owners put up demenstrations in front of the housing sales centre because they feel they are cheated by the developers.

  • Sucker Punched

    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.

  • Michael

    John clearly made the point. I am not sure I would have done like him (as I hesitate since 2 to 3 years already :) but from todays point of view he did a great investment and I think the original post is not rational at all.
    Dont misunderstand me. I fully agree on china properties are priced unreasonably. But how can someone agree on that it has been right not to buy a condo in china many years ago? Looking back it doesnt matter if the prices are unreasonable or what risk U took. The only thing matters is how much did someone earn within that time.
    By the way the statement “new condos are often much more expensive…” is meaningless. Anywhere in this world a new condo of comparable quality and location will be more expensive. In china additionaly it has to be considered those condo is yours for 70 years only which means after 7 years 10% of the owndership time (to get a return on investment) is gone already.
    So what is the inteniton of that article? Do U want us to acquiesce it has been right not to buy a condo in the past? Sorry Dan, it has been not. If U want us rethink an investments now U might be right … eventually ;)

  • Twofish

    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.

  • Twofish

    Harris: Whoa, whoa, whoa. I think this reasoning is horrible. I agree that prices are relative, but what they are really relative to is incomes and on that score there is a huge difference between China and the United States
    For some jobs. A corporate counsel for an international firm or a high end software developer will make roughly the same amount of money in Beijing as in Seattle. Many large international companies have unified their pay scales so that people in different parts of the world make the same money.
    One common mistake is to think of China as a “poor” country. It’s a lot more complicated.

  • C.

    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?

  • RE Sales

    Whenever someone talks of how China real estate prices are going down, someone who owns real estate in China always feels it necessary to claim otherwise. They are wrong and they are just refusing to admit it.

  • Twofish

    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.

  • http://www.summitchina.ca Marius Schutz

    One more point – also in China it is location-location-location -
    Let’s stop talking about China as if it is one homogenous country like say Andorra?
    There are many China’s and in each of them many locations -
    If you buy in any city downtown, prices will still relatively high and I don’t see them coming crashing down – and resale prices particularly will stay high – but anywhere away from downtown: take shelter!

  • BC

    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.

  • LH

    Seems to me that the big cities of the world that act as centers of international business, finance, commerce, etc., have a top tier of real-estate that is, in effect, a single worldwide market. NY, London, Shanghai, Beijing, Tokyo, Paris, all these cities have a pretty sizable chunk of real estate in this category. That international market binds together the prices of high-end apartments across countries, to an extent. Just below that, those cities have a much larger second tier of real-estate that is unusually valuable because of all the business / career opportunities and quality of life that come with being in such a city. The highest real-estate tier has a huge influence on the lower tiers, not just through pricing but because of what it represents: a lot of wealthy, internationally connected people living and working in the city.
    It was my expectation from the first day I set foot in Shanghai that it’s real estate prices would be on as asymptote that leveled out at NYC / Paris / London / Tokyo prices, and I feel the same way about Beijing although I think that it won’t happen until the air quality improves a lot in Beijing’s case (i.e., the international crowd isn’t quite ready to pay top dollar to live in Beijing yet, and it’s because of the air).

  • http://www.foarp.blogspot.com FOARP

    @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.

  • Matt

    Where is DC?

  • http://www.CrosstheRubiconBlog.com Ben Shobert

    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!

  • Twofish

    FOARP: 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.
    As opposed to what? One thing about real estate is that it tends to track inflation. If you put RMB$100,000 in an apartment and 35 years later you sell it and get RMB$100,000 in inflation adjusted terms, you are doing a **lot*** better than if you put it into a bank account. Real estate (if you pay cash) makes sense if you are worried about inflation, or if you are worried about a crash.
    Yes the real estate market is prone to crashes, but those crashes are correlated with everything else. If you put your money into stock and the market crashes, you may end up with zero. If you buy an apartment and the market goes to hell, you at least have a place to live.
    FOARP: If real-estate is being used in place of other investments, then this means several things.
    It means that the Chinese financial system could work a lot better than it does. It would be really nice if there were a liquid corporate bond market, by which people could put their money into financial instruments that goes directly into creating factories. But there isn’t.
    While we are waiting for a better system to evolve, we have to work with the system that we have. While it’s a very silly to have people put their wealth into concrete shells, it’s not that much more silly then having people put their money into shiny bits of yellow metal.
    Now it’s a silly system. At some point people will come up with a better one, and it’s reasonable to assume that as people come up with a better system people that have their wealth in the current one will be able to transition to the new one.
    FOARP: 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.
    Real estate prices are falling because the government wants prices to fall. The Chinese government has enough control over the stock and real estate markets so that they can set the price of those markets at where ever they want it to be.
    There is the expectation that if real estate prices go too low, then the government will take some action to shore up prices. The government has a lot of control over land use policies and by passing regulations that limit the use of land (what HK did), it can keep prices from falling too low.
    There are three investments available to domestic savers in China. Bank accounts, real estate, stock market. All of them are bad, but real estate is the least bad, which is why you have so much investment in them.

  • Sam

    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.

  • http://www.joyceyland.com Joyce Lau

    You know what they say about lies, damned lies, and statistics.
    For those of us who have travelled and moved around — do these numbers make common sense?
    New York City is cheaper than Shenzhen?
    New York almost always makes the top-10 most expensive cities in the world. Shenzhen is never on these lists.
    My New York friends have rents and mortgages similar to what we pay in Hong Kong.
    Meanwhile, Shenzhen properties are a fraction of what they are in either HK or NY, both for renting and buying.
    (And what the heck is “NYC-NJ”? Does that include farmland in southern New Jersey? Because that would seriously skew your stats)
    This graph reminds me of an old China Daily article that flippantly reported, “Now that salaries are the same between Shenzhen and Hong Kong…”
    The tone was that this was just a common assumption. But all of us who live here know that for 90% of workers, Shenzhen salaries are a fraction of what they are in HK.
    If anything, this chart shows how grossly overpriced Chinese properties are given other economic factors.
    Per capita income in the US is about $40,000. In mainland China, it’s $5,000.
    If American and Chinese homes are about the same price (as this chart claims) then the average Chinese person is totally screwed.

  • Twofish

    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.

  • Twofish

    Also if you want to get an idea on what US/China income distributions look like, take a look at
    http://www.gapminder.org/downloads/income-distribution-2003/
    And also google for Hans Rosling.
    The applet cuts out at 2003. If you extend this to 2011, you’d expect to see the pink splotch of China move upward.
    Also, I know who is buying those condos. You have a pretty large number of scientists and engineers some of whom are “hai gui” returnees, that are making decent salaries in China. If you look at the income distributions and imagine what it likely looks like in 2011, you’ll figure out that Chinese companies can pay a lot of money for scientists and engineers, and they are the people that are buying a lot of the condos.
    The comparable salary levels of lawyers versus engineers in China/US worries me vis-a-vis the long term growth of the United States. I can imagine how a nation of engineers can generate economic growth, but I’m at a loss to figure out how you can get economic growth with a nation of lawyers.

  • LH

    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

    My observations of the hyper-rich is that it they would rather buy property outside of China. Part of the reason for high real estate prices in California and Florida are that there are a lot of foreign buyers that want to park their foreign exchange.
    A lot of the local purchases are due to a group of people that don’t have a name assigned to them. You have a lot of people that made $150K-$200K as engineers in Silicon Valley that have moved back and are making about $80K-$100K in some Beijing or Shenzhen startup that are paying salaries of $30-50K to local engineers. Since they sold their house in Silicon Valley, they have the cash to buy something similar in Beijing/Shenzhen. Making $100K/year does not make you Bill Gates, but there are a lot of people in that range, and part of the reason they are there is that the Chinese government is dumping money into strategic industries, and I know first hand that people in this income range are buying condos (in Beijing and Shenzhen at least). There’s also a “pay to play”. If you are a high tech Western company, the Chinese government simply will not let you in the market unless you promise high technology jobs.
    And it’s not a small number. Microsoft is massively expanding in Beijing.
    http://www.china.org.cn/business/2008-05/07/content_15093302.htm
    You can also take a look at the typical salaries in Beijing via glassdoor
    http://www.glassdoor.com/Salaries/beijing-salary-SRCH_IL.0,7_IM997.htm
    Interestingly, Shanghai *isn’t* a high tech center. The two centers are Beijing and Shenzhen, because that’s were the universities are, and the fact that the top three are computer centers (Beijing/Shenzhen/San Francisco) makes me think that this has something to do with “moderately wealthy computer geeks” more than “hyper-wealthy jet setters.”
    I’m not too worried about the real estate bubble. However, what does long term worry me is that in China, software engineers make a lot more than lawyers which means that people want to be software engineers. In the US, lawyers make more money than software engineers, so everyone wants to be a lawyer. It’s the long term impact of that dynamic that worries me, and I’m more worried about the US than I am about China. Lawyers are wonderful and valuable people, but I just don’t see how you can create a growing economy based on training more lawyers.

  • http://www.foarp.blogspot.com FOARP

    @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.

  • Twofish

    Lau: New York City is cheaper than Shenzhen?
    If you are talking about cost per square meter then that number makes sense. Shenzhen has considerably lower rents than NYC, but the cost of housing is more expensive if you include the NJ suburbs.
    Also for people in the “rich software developer” group of people, Shenzhen and Beijing are more expensive than NYC. Hong Kong kills with with rent, but the taxes are a lot lower.
    Lau: My New York friends have rents and mortgages similar to what we pay in Hong Kong.
    But they are living in much larger houses. For US$3000/month you can a 2500 square foot two story house with a yard and 4 bedrooms in the Jersey suburbs. For US$3000/month you are looking at an extremely cramped square foot apartment.
    Also in the case of PRC apartments, the rents are tiny in comparison to the cost of housing. This is a problem since people buy apartments and it’s not worth their time and effort to actually rent it out.
    It it true that prices in Shenzhen are lower than HK but HK rent and land prices are freaking insane, but the low taxes make up for that.
    The other thing that I noticed is that the number is price/square m, and people in China will often live in very cramped apartments.
    Lau: Per capita income in the US is about $40,000. In mainland China, it’s $5,000.If American and Chinese homes are about the same price (as this chart claims) then the average Chinese person is totally screwed.
    If he wants to own a home. However, rents in Mainland China are tiny in comparison to house prices.
    FOARP: Either the stats shown are wildly missleading, or the markets are messed up
    Oh, the Chinese real estate market is very seriously messed up. The only question really is how messed up they are, and in what way they are messed up.

  • LH

    @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.
    Those that didn’t lost out. Deal with it instead of whingeing.
    Who here on this blog not in China can actually afford to buy there now? Very few I bet.

  • http://www.foarp.blogspot.com FOARP

    @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.

  • matt

    @ LH
    I just finished remodeling my apartment in a 30 year old building in central (near 2nd ring road) Beijing. I’ve also remodeled houses in the US. There are similarities if you just look at the painted walls, but it would be hard to overstate the differences in building quality.
    Chinese homes are not comparable to US homes because almost every Chinese home wouldn’t pass code in the US. My original plumbing didn’t have any traps or vents. Sewer gas vented directly into living spaces. Load-bearing brick walls had 3-inch gaps between each brick and the bricks were little more than dust held together by Elmer’s glue. No insulation, whatsoever. The electrical just basically one big loop from the main fusebox to the outlets. There were no dedicated circuits for major appliances. No GFCI-protected receptacles in the kitchen or bathroom. The quality of materials is also vastly different. My original soil stack was so corroded it looked like it was pulled off an 18th century shipwreck.
    At least in my highly unprofessional survey of friends & relatives apartments in China, my apartment’s construction is pretty typical.
    And then you get to differences in what constitutes a typical house sold on the market. Homes on the US market are typically move-in ready with expensive stuff like central air systems and double pane windows. Homes on the Chinese market are typically sold as empty shells and even the house is “decorated” it is common for buyers to demo everything and rebuild.

  • sam

    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.

  • LH

    I feel the same was as sam. My current home in Beijing has interior walls that are a foot thick of solid concrete. I owned a home in Shanghai that was the same — in the case of that condo, I lived there for years and never heard a neighbor, below, above, or beside me. I looked at quite a few new properties in Shanghai, and the fact that they were not built out on the interior — that I would have had to put in the flooring, wall covering, etc. — was a big plus in my mind as I could finish it out according to my taste instead of one-size-fits-all for the whole complex. I always marvel at how few fires there are in the cities of China as compared to the U.S., and what sam says (no wood) is the reason. I’ve rented some condos in California that were multifamily dwellings and wood framed! I could hear everything through the walls of the unit. I very much prefer the steel-reinforced concrete that’s common over here.
    The systems (plumbing, electrical) can be bad here, especially in older buildings, but I’ve seen buildings where the systems are excellent as well. Electrical systems in the U.S. tend to be very good, but in modern construction the bulk, sometimes the entirety of the plumbing is now PVC, which seems like a second-rate building material to me.

  • matt

    @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

    @matt: oh gosh, the wood framing is huge in relation to fires; they act as a powerful container on fires and prevent them spreading. that’s why firewalls (even in the U.S) are not made of wood.
    I lived in a small midwestern town not long ago, and there was a fire in an old wood-framed and wood-floored building in the downtown. the whole building went up top to bottom, and produced heat so intense that it blew out windows across the street! Think of the Chicago fire for example, where the whole city was wood framed and the fire burned virtually the whole city to the ground.
    -LH

  • matt

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

  • m1626

    ur not comparing houses with the same quality, from what i know a tiny apartment costs 5,000 dollars/sqm