8 Economists' Investment Tips
Lu Ming: “The Spatial and Temporal Pattern of Real Estate in China” -- Understanding the Misconceptions of China's High Housing Prices
Summary of this issue
Are high housing prices printed on banknotes?
Are housing prices in China high because they are just needed?
With aging and declining birthrate, will there be so many houses in the future that no one wants them?
Are there serious real estate investment needs in first-tier cities?
What's in this issue
After talking about these principles, including international and domestic trends, I would like to respond in particular to a few very popular opinions about housing prices in China. I doubt that even before hearing this course, people might have thought the same way. Next, I want to ask you some questions from six aspects. I hope to help you correct some opinions that are probably very popular. Just like the flu, what is popular is always good, and not necessarily right.
First question, there are many people in China who hold this view. They think that the high housing prices in China are due to loose currency; they are printed on banknotes.
Is this a correct opinion? Half right, right where? I mentioned earlier that high and low housing prices are related to high and low interest rates. The lower the interest rate, the higher the demand for buying a house, so the higher the housing price. When a country issues banknotes at a macro level, an increase in the money supply will cause prices to rise, while rising prices will cause real interest rates to fall. What does that mean? The real interest rate is equal to the nominal interest rate minus the rate of inflation.
The nominal interest rate is when you go to the bank for a loan. For example, it will require you to pay 5% or 7% interest per year. This is called the nominal interest rate, but in reality, is the interest you pay to the bank actually worth 5% or 7%? After deducting the rate of price increase, the real interest rate is the real real interest rate. Therefore, if the currency is very loose and causes prices to rise rapidly, the actual interest rate is even lower. In this sense, it is half correct to think that China's low interest rate policy and monetary policy have boosted housing prices.
What I'm going to talk about next is the other half that's not right. As I told you earlier, the Chinese market is fragmented. If you think that currency is driving up housing prices, let me ask you a question. When you get RMB, there are no restrictions on you having to buy a house in Shanghai; you can go to a small to medium city to buy a house, then how can you explain that only places like Shanghai and Beijing have particularly expensive housing prices, while housing prices in many small to medium cities are not expensive, or even fall in the past? I've shown you before. Housing prices are falling in many cities in China.
Therefore, I think monetary looseness and low interest rates are the causes of high housing prices in China; at most, I am only half right. This is the first question.
Second question. Many people say that housing prices in China are high because they just need a lot. For example, many people get married and want to buy a house and improve their living conditions; these are just what they need.
If you understand housing prices from the demand side, I think that's only half right, which probably explains why there is a phenomenon of housing price differentiation between first-tier cities and second-tier and third-tier cities in China. But I want to ask, since they're all just needed, why aren't housing prices actually expensive in some cities in China? Even in big cities, housing prices in large coastal cities are relatively expensive, but housing prices are not that expensive in many large cities in central and western China.
I'll use a standard to tell you why housing prices in many major Chinese cities aren't very expensive. I've already mentioned the concept of the ratio of housing price to income. If I go to a first-tier city in central and western China, or some second-tier cities with better development, and look at the situation of the middle class in such cities, the most representative occupation is a civil servant. This is a relatively standard middle class. The monthly salary of an ordinary civil servant is about 3,000-4,000 yuan. I'm not talking about Shanghai; it's a first- or second-tier city in central and western China; a higher one could reach 5,000 yuan.
What does that mean? If both husband and wife are civil servants, then the monthly income of this family is about 8,000-10,000, which is a relatively standard monthly income level for middle class families. If housing prices in this city are 8,000-10,000 per square meter, what does that mean? A household can buy 1 square meter per month's income, 12 square meters a year, and 120 square meters in 10 years. For such families, the ratio of housing price to income is about 10. Because the 120-square-meter house is already very good, and I haven't considered that household income may rise over time, and housing prices are also locked in, according to the income of a middle class household, the housing price is about 10 times the annual income of this family, which is actually quite normal. The real expensive houses in China actually appear in big coastal cities, where the ratio of housing prices to income far exceeds what I just mentioned.
If you only explain it from the perspective of immediate needs, why is there such a division? Even within first-tier cities, you'll find that for a long time, housing prices in Guangzhou have been lower than in Shenzhen. Why? There is actually not much difference in GDP per capita between the two places, but housing prices in Guangzhou have been lower than in Shenzhen for a long time. This is actually due to supply-side factors. For a long time, the housing supply in Guangzhou was about three times that of Shenzhen.
This is the principle of steamed buns I mentioned earlier. If you make more steamed buns, the price will be lower; if less steamed buns are made, the price will rise, and the ratio between price and income will be higher. So I just mentioned that housing prices cannot be explained from the demand side alone; in particular, tight differences in supply between cities can also affect differences in housing prices between cities. This is the second factor I'm talking about.
The third idea is also very popular. People often hear that China has now experienced serious aging and declining birthrate. With the trend of population aging, in the future, Chinese children will leave him a house, grandparents will leave him a house, and mom and dad will leave him a house. That is, when they all leave this world, children will inherit 3 houses, and there will be so many houses that no one wants in the future.
But the question is again. The house prices we are talking about today are high or low; in fact, we are mainly talking about urban houses. Even though the entire population of China is aging, there are more people in cities, especially in big cities, especially in first-tier cities, so there's no need to worry about not being able to sell houses at all. Let me give you an example. Japan has already experienced negative population growth, and Japan's urbanization process has ended, or come to an end, and has entered a very advanced and mature stage. However, when the entire population of Japan experienced negative growth, the population of Tokyo was still growing positively, so there is no need to worry at all that aging and declining birthrate will cause demand in the urban real estate market to shrink.
But I do want to remind everyone that cities are not the same. While the population of some cities in China, especially first-tier and second-tier cities, is growing positively, there are indeed some cities with negative population growth. This is what we call the concept of shrinking cities.
In China today, 1/3 of cities have experienced negative population growth, and in the future, the population will be redistributed among cities. When the population of some cities continues to grow positively, some cities will experience negative population growth. In particular, as mentioned earlier, third- and fourth-tier cities that are far from large ports and far from major regional central cities, I'm afraid there will be negative population growth. At this time, housing price differentiation between cities will be a long-standing trend. On this point, I want to remind everyone that cities are not the same.
The fourth opinion is also very popular. It says that Chinese cities, especially first-tier cities, have serious real estate investment needs, and even stigmatize it as speculative demand.
In the past, when government policy regulations were relatively low, I'm afraid this statement was true, because there were no restrictions on buying a house in the real estate market back then; as long as you had money, you could buy a dozen or even dozens of houses. The demand at that time was indeed investment, or speculative.
What has the status been in recent years? Since 2016, we have strictly controlled market demand. Currently, foreigners without household registration want to buy a house in Shanghai. It is very difficult to pay social security for several years in a row. If they have a household registration, each family can only buy two houses, so many families choose to buy more houses through divorce. There is now a popular saying that they are afraid to get divorced if they are not in a good relationship now. If they get divorced in order to buy a house, they will probably settle down. There is also an example of this. They originally divorced to buy a house, but in the end, they actually got divorced.
What reason am I talking about? Now our investment needs and speculative demands in the real estate market are strictly controlled. If you take a look at the transaction data on the market, you'll see that the vast majority of people who buy houses on the market actually sell small houses and buy bigger houses out of demand for replacement. Under such circumstances, housing prices are still rising. Can you say it is investment demand and speculative demand? I'm afraid I don't think so well. This is my fourth point.
That is the content of this course, thank you all.
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