You may be surprised to learn the average price of a new apartment in Hong Kong isover $2M, making it the most expensive real estate market in the world in terms of price levels. This trend isn’t only in Hong Kong though;it is difficult to buy property in any of mainland China’s top tier cities, withprices skyrocketing to severely unaffordable levels. In fact, 7 out of the 10 most expensive property markets in the worldare in China.
At the chart above from the IMF (International Monetary Fund), Chinese cities are the most expensive places in the world to buy property on a price-income ratio,evenmore so than developed global cities. A price to income ratio of 4 or above is already considered very pricey, but Chinese cities are well above that. In Beijing, the ratio is 22.3, meaning that, on average, a person making $50,000 a year would be living in a $1.12M home. Though Beijing's GDP grew about 800% between 2000 to 2016, the property prices grew even quicker. This rapid GDP and property price growth is seen in all of China’s major cities, making them very expensive places to buy property. The chart from Zillow comparing prices in US and Chinese metropolitanareas show property per square meter being drastically more expensive in China.
The confusing statistic is thatdespite these high prices, China has a very high home ownership rate of 70% among millennials compared to the US rate of 35%. How are the Chinese able to afford their expensive properties? Even considering tremendous income growth, their average salary is still considerably lower than that of the US and Canada’s. The answer is not how much they make, but how it is used.
China has an unusually high savings rate of about 50% compared to the US rate of 18%. This correlates with investments as a share of GDP of 48% and 15%, respectively. This means the average person in China is living well below their means and saving a large share of their income, giving them a higher capacity to invest and purchase property.
And they aren’t just buying one property. The Chinese are using generations of savings and investments to purchase multiple homes with the vision of selling for a much higher price in the future and living off the capital gains earned. In their eyes, property investing is higher growth, simpler, and more tangible than other investments-even stocks. They aren’t even that concerned about rent revenues, with capitalization rates averaging below 3% in expensive cities. They are so focused on price growth that making money off rent is somewhat irrelevant to them.
With people constantly in the market for new homes, demandrisessignificantly and then price is further heightened. You see this price effect not only in Chinese cities, but in many global cities with a large Chinese presence such as Vancouver, Sydney, and San Francisco. Families with large savings wish to spread their assets in cities such as these and thus the market prices are raised to adjust for the increase in demand. Property speculation isingrainedinto the modern Chinese way of life and they bring the ideology with them even when they go overseas.
Also,with very high GDP growth in majorChinesecities, many people are constantly flocking to them and are able to create new fortunes for themselves. This then puts them in the market for housing investments and creates additional upward pressure on the property markets.
The phenomenon of mass real estate investing has led to a lucrative property industry, with many Chinese development groups among the world’s largest companies. The high demand has allowed developers to continue raising prices to earn more profit. The industry is so large that the Financial Times estimates nearly half of Chinese investment is in property. With GDP in 2018 being around $14T and an investment rateof about 48%, this would mean this oneparticularmarket accounts for around $3.4T of GDP. This is about the size of Germany’s entire GDP, the 4th largest economy in the world.
The massive size of this industry helps driveeconomicgrowthand expands the population capacity of cities, but it is often criticized for causing social issues. Families lower their living standards by living cheaply to save up for property with the hopes that it will pay off in the future.The ultra-wealthy property developers’ ambitions haveledto conflict as well. Although the average price of a new flat in Hong Kong isover $2M, these are nothomesthat North Americans would consider very luxurious. They are often small in size, simple, far away from the city center, and of lower build quality than flats you would find in New York or Toronto for comparable prices. You would have to spend much more to get truly high-end properties. The dramatic rise in prices and demand have given developers the power to raise prices without increasing quality and to build smaller flats in order to raise profits.
They are able to further capitalize by raising prices to unfathomable amounts in the high-end market. An example of the absurd profit margins is the Mount Nicholson development in Hong Kong, where a row of luxury townhousesisbeing built and selling for$150M USD per unit. In comparison, the price for one of these homes would be able to build an entire brandnew luxuryhigh-risein Montreal.
The government benefits from thisbehaviorthough. In the sameneighborhood, a land plot on Mansfield road was listed recently by the city’s government for $6.2BUSD, making it the most costly land in the world. They are determined to enforce this aggressive price as they have already rejected several bids for around $5B. When a wealthy developer purchases the land, it will go towards the city's government’s revenue and help keep the low-tax system set in place. Other Chinese cities also see the same revenue benefits in selling expensive land.
Another criticized point of thedevelopers’profit-seeking behavior is that it adds to growing income inequality. China has a very highgini-coefficient,meaning there is a large wealth gap between classes. There is a prominent class of high net worth individuals, with many more being created daily, and then an underclass of low-wage workers. In fact, Hong Kong has moremulti-millionairesthan any city in the world, even surpassing New York recently. It seems like the system set in placeis unlikely to change soon,as low taxes and abusiness-friendlygovernment have been accredited for high GDP growth.
Overall, the big questionis whether the high prices are sustainable.Real estateis closely watched by the government since it makes up a considerable portion of GDP and a major decline would severely affect the overall economy. Regulators in Beijing often perform contractionary and expansionary policies in tier one cities when needed to reduce risk and fuel growth. With such high prices, however, it is still uncertain what will happen in the future.
What is certain though, is that the social issues of housing will continue to worsen if prices keep rising. Though the government has implemented cooling measures in the severely expensive cities recently, the prices have not dropped significantly, making it very hard for average people to buy homes. The positive aspect for citizens is that rent prices are not extremely high due to low cap rates and there are vast amounts of low-rent, subsidized housing provided by the government. Additionally, it is easier to live on a budget in China due to the generally lower cost of goods and services.
In recent yearsChina’s economy has seen massive growth and living conditions are certainly far superior than they were a few decades ago. Their economy is rated the largest in the world in some measures, but its per capita GDP is still trailing well behind wealthy, developed nations. The country is set to become more and more dominant in international business and influence, but it is unlikely that their average living quality will catch up to North American levels in the next few decades. Their property markets may face risk in the future, but for now it seems like they will remain the mostexpensive inthe world and continue to rise.
As an enthusiast with a deep understanding of real estate dynamics, particularly in the context of China, I'd like to delve into the comprehensive analysis provided in the article.
The article begins by highlighting the exorbitant prices of new apartments in Hong Kong, emphasizing that it is the most expensive real estate market globally. This claim aligns with well-established data, including reports from sources like the International Monetary Fund (IMF), which is cited in the article. The IMF chart underscores the soaring property prices in Chinese cities, surpassing even those in developed global cities when considering the price-income ratio. This ratio, notably exceeding 4 in Chinese cities and reaching 22.3 in Beijing, reflects the immense challenge of affordability for the average income earner.
The narrative skillfully connects economic growth, particularly in GDP, to the rapid escalation of property prices in major Chinese cities. Despite impressive GDP growth, the article argues that property prices have outpaced this economic expansion. Zillow's data, comparing property prices in the U.S. and China, reinforces the staggering cost per square meter in Chinese metropolitan areas.
The article then introduces a paradox: while property prices are exceedingly high, China boasts a remarkable 70% home ownership rate among millennials, in contrast to the U.S.'s 35%. This paradox is explained by the unusually high savings rate in China, around 50%, compared to the U.S.'s 18%. The article contends that this high savings rate gives Chinese individuals a substantial capacity to invest and purchase property, even with lower average salaries.
Furthermore, the article sheds light on the Chinese approach to real estate investment. It argues that the Chinese are not just buying one property; instead, they are using generations of savings and investments to purchase multiple homes. The focus is on property as a higher-growth, simpler, and more tangible investment compared to stocks. This approach is seen as driving demand and subsequently raising property prices, not only in Chinese cities but also in global cities with a significant Chinese presence.
The article also highlights the massive size of the Chinese property industry, estimating that nearly half of Chinese investment is in property. This industry's substantial contribution to GDP is compared to the entire GDP of Germany, the world's fourth-largest economy.
The consequences of this property-focused culture are explored, touching on social issues, conflicts arising from ambitious property developers, and growing income inequality. The article illustrates how developers can profit by raising prices without improving property quality, leading to criticism and social challenges.
The concluding sections of the article address the sustainability of these high prices, acknowledging that the government closely monitors real estate due to its significant contribution to GDP. Despite cooling measures, the article suggests that prices have not dropped significantly, posing challenges for average citizens looking to purchase homes.
In summary, the article provides a comprehensive exploration of the factors contributing to the exorbitant property prices in China, combining economic indicators, investment strategies, and societal impacts to present a nuanced understanding of the complex real estate landscape in the country.
