For example, in Why China Can't Cool Its Overheated Real Estate Boom, I explained that China's real estate bubble has been fueled by political policies that encourage rampant real estate speculation by local governments.
But political policies are only part of the picture -- cultural issues are also feeding the real estate frenzy in China. Before we consider cultural factors, let's settle the issue of whether China is in fact experiencing a housing bubble.
Even as sales of new homes in Shanghai fell to a five-year low in May, the average home price in Shanghai rose 21% to 24,833 yuan per square meter -- or about $254,000 for a 750-square-foot apartment. Given that the average urban annual wage in China is 29,229 yuan (renminbi) -- or about $4,285 at the official exchange rate of 6.82 yuan to the dollar -- the average apartment in Shanghai is selling for an astronomical 60 times the average urban wage.
According to the U.S. Social Security Administration, the average wage in the U.S. in 2008 was $41,335. If U.S. real estate prices were as high as Shanghai's, this would translate into an average home price of $2.46 million.
Even if we reckon most Chinese families have two wage earners, that still places the income-to-home-price ratio at 30 -- far above the ratio of four times income considered prudent in the U.S. Clearly, China is in the grip of an unprecedented housing bubble.
Key Financial Influences on Housing Prices
What financial factors might be driving prices to the stratosphere? Experts in China's economy typically list these key influences:
- Chinese savers have limited investment alternatives, the Chinese stock market is still small and many Chinese investors are wary of stocks after the bubble popped in 2008.
- There is no history of a downturn in real estate values since China converted to state ownership of housing private home ownership in the early 1990s.
- China doesn't have property taxes, so there are minimal costs to own idle property.
- Fear of inflation. This concern isn't without reason, as Chinese officials expect prices to rise this summer. Chinese households typically see real estate as a relatively risk-free hedge against future inflation.
The One-Child Policy
Like other nations that traditionally favor male children as heirs, China has a heavily skewed gender ratio: There are 122 baby boys born for every 100 girls. This is the result of parental selection via ultrasound technology and abortion. That means one out of every five boys faces a future without a wife.
The British Medical Journal last year estimated that China faces a surplus of 32 million males under the age of 20 -- about the size of Canada's population. That suggests the competition for wives will become intense. Owning an apartment is already considered an absolute necessity for attracting a bride. The family of a prospective bridegroom must scrimp and save in order to buy a home, lest their son's chances of marriage diminish.
Columbia Business School professor Wei Shangjin recently provided statistical evidence for this by showing that Chinese families with a son save at far higher rates than those families with only daughters.
Bride Price Scams
This competition has led to the marriage equivalent of "signing bonuses." In rural areas of China, some bachelors and their parents offer prospective mates a cash "bride price" that can run as high as $5,000 -- several years' income for a farming family. One result of this "bidding war for brides" is the phenomenon of "runaway brides" who pocket the "bride price" cash and then promptly disappear.
With the family's future on the line, it's little wonder that households with sons are saving to buy a flat for their male heirs.
That doesn't explain why many households have bought multiple dwellings, of course. For that, we have to refer back to the financial factors of seeking an inflation hedge and a "safe" place to park the household's prodigious savings.
According to Professor Wei's research, the average Chinese household saves 30% of its disposable income, up from 16% a decade earlier. That's a lot of cash seeking a safe investment.
Ironically, the search for a safe haven for China's massive private savings has helped inflate a dangerously precarious bubble in China's real estate -- one that not even anxious bachelors and their families can prop up at today's nosebleed valuations.