The possible housing bubble in China

While the American housing crisis continues, FinanceAsia takes a look at the current housing situation in China:

Many homebuyers nowadays in China consider their property assets as part of their long-term savings plan, as well as a hedge against inflation.

Why property? China’s tightly run financial system leaves only three places for its zealous savers to put their money. Bank deposits are one option. But they yield 2.25%, less than the 3.1% rise in May’s consumer price inflation. The equity markets are a second choice. But stocks have been performing poorly; Shanghai’s benchmark index was one of the world’s worst performers in the first half of 2010. (And the bond market is underdeveloped.) Even with its high transaction costs and manic price moves, property has become the preferred investment choice for everyone from young married couples to middle-aged factory workers trying to ensure their retirement.

Recent statistics show that there are about 64 million apartments and houses that have remained empty during the past six months, according to Chinese media reports. On the assumption that each flat serves as a home to a typical Chinese family of three (parents and one child), the vacant properties could accommodate 200 million people, which account for more than 15% of the country’s 1.3 billion population. But instead, they remain empty. This is in part because many Chinese believe that a home is not a real home unless you own the flat.
And so people prefer buying to renting, and as a result, the rental yield is relatively low.

That’s a lot of vacant property. This is a testament to the power of cultural norms regarding housing: since renting is less desirable, a large percentage of the housing stock goes unoccupied. Also, savings behavior seems partly driven by these norms (and perhaps also by limited economic returns elsewhere) – houses have developed into investments rather than just places to live.

I don’t know much about the Chinese housing market but it is intriguing to read about non-American norms and values attached to housing. I wonder how these norms and values developed over time.

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