Pride of Ownership?
Thursday morning I had to go to the Embassy to pick up my new passport. I had some time to stop at a Starbucks before going home where Randy was staying with the kids. I ended up sitting next to an American man and we struck up a conversation about living in China.
He had been here for three years, married to a Chinese woman, and their family within the past year welcomed a baby. He had come to China not as a privileged expat but as someone interested in doing business for himself in China. Nice guy, but clearly not wealthy from his ventures.
In what is becoming a recurring theme for me, he had no idea where Changping was when I answered where I lived. I told him we were south of the Ming Tombs, which helped clarify a little. He then asked me what the real estate was selling for out our way because he was looking all around Shunyi for a house with no success. He couldn't understand how properties could be determined to be so valuable when they were unheated, or hadn't any hot water.
I told him that we were not in the market to buy, nor did I foresee us doing so, which surprised him based on the amount of time my family has lived here (we get similar responses from other Changpingren). I couldn't tell him what to expect in home sales in any part of Beijing. I could tell him rent, and perhaps that would be a good guide, but as for selling price I was lost.
He was curious why we had not spent much time looking at buying property. I told him about our experience in Shenzhen with our apartment that sold while we were still living in it. It was then and still is now hard for me to understand how our rent could be at least 3000 RMB less than the landlord's mortgage (we later learned an even higher number for the mortgage, like closer to 5000 RMB more. The selling price was more than US$250,000).
I could not grasp the disparity between rent and mortgage, nor the incentive to buy, and especially the incentive to buy multiple apartments as many people did (and still do). These weren't income properties but investment properties. It seemed the only money to be made is on future appreciation that would only come into being at resale.
I told him about another apartment in our Shenzhen complex that was owned by an American man,. He fully expected this second apartment to be an income property, so the rent he charged was based on his mortgage and amortized improvements and furnishings. In a garden where similar-sized and equipped apartments rented for 6,000-8,000 RMB, this man was looking to get at least 12,000 RMB. I hadn't looked at this apartment, but a friend of mine did. It was beautifully done inside, but she could not justify the additional cost when so many other apartments in the same building even were as nice for so much less money.
The American man with whom I was talking nodded. He volunteered that he had tried to tell his wife that he wasn't certain that buying a home in China was the best financial decision for their young family. While the pride of ownership is certainly a big factor (and especially in China these days), he could not see how buying a home at that moment would benefit his family finances. They already had enough for a down payment saved (an amount he did not reveal to me but indicated later in the conversation that with what they had saved they could pay cash for a home in the American mid-west). Once they started paying the mortgage, they would have less money month-to-month than when they were renting.
It still isn't clear to me what any one gains with owning their home in China, short of pride of ownership. The financial gains, if any, could only come after the property is sold, or once the mortgage is fully paid. Of course, I'm looking at this as an American, and the guidelines that normally govern these sort of transactions, and the concept of building equity, and its value, is something I don't know much about in China. I do know that a friend of a friend of mine in Shenzhen, someone who owned an bar of, ahem, some renown, bought two apartments in her hometown of Chongqing that she planned on leaving completely unfinished. She was not going to install walls, or flooring, or in anyway make them livable. She planned to sit on them and re-sell them, unfinished, because that was how she believed she would make the most money on them. In the first month of ownership alone, she gained 40,000 RMB on her investment just by increases in the market prices. She would make more money doing nothing than if she invested any further money in the properties.
So I am still not sold on the benefits of being a homeowner in China. It's possible that perhaps some high-income Chinese couples are also reconsidering. Like everything I have blogged on this topic, the evidence is anecdotal. A few weeks ago Bill Bishop related this on his Sinocism blog
He explores a few possible reasons for this, including some new regulations regarding purchasing new homes in Beijing, but I have to wonder if the dynamics of the real estate market for selling homes has gotten to the point where many of the conventional buyers (high income urban couples) see no point in owning. Renting means far less money up front, and less money paid month-to-month. A renter can maintain a much higher standard of living, if you are interested in having disposable income and what that brings (iPhones, vacations).
He had been here for three years, married to a Chinese woman, and their family within the past year welcomed a baby. He had come to China not as a privileged expat but as someone interested in doing business for himself in China. Nice guy, but clearly not wealthy from his ventures.
In what is becoming a recurring theme for me, he had no idea where Changping was when I answered where I lived. I told him we were south of the Ming Tombs, which helped clarify a little. He then asked me what the real estate was selling for out our way because he was looking all around Shunyi for a house with no success. He couldn't understand how properties could be determined to be so valuable when they were unheated, or hadn't any hot water.
I told him that we were not in the market to buy, nor did I foresee us doing so, which surprised him based on the amount of time my family has lived here (we get similar responses from other Changpingren). I couldn't tell him what to expect in home sales in any part of Beijing. I could tell him rent, and perhaps that would be a good guide, but as for selling price I was lost.
He was curious why we had not spent much time looking at buying property. I told him about our experience in Shenzhen with our apartment that sold while we were still living in it. It was then and still is now hard for me to understand how our rent could be at least 3000 RMB less than the landlord's mortgage (we later learned an even higher number for the mortgage, like closer to 5000 RMB more. The selling price was more than US$250,000).
I could not grasp the disparity between rent and mortgage, nor the incentive to buy, and especially the incentive to buy multiple apartments as many people did (and still do). These weren't income properties but investment properties. It seemed the only money to be made is on future appreciation that would only come into being at resale.
I told him about another apartment in our Shenzhen complex that was owned by an American man,. He fully expected this second apartment to be an income property, so the rent he charged was based on his mortgage and amortized improvements and furnishings. In a garden where similar-sized and equipped apartments rented for 6,000-8,000 RMB, this man was looking to get at least 12,000 RMB. I hadn't looked at this apartment, but a friend of mine did. It was beautifully done inside, but she could not justify the additional cost when so many other apartments in the same building even were as nice for so much less money.
The American man with whom I was talking nodded. He volunteered that he had tried to tell his wife that he wasn't certain that buying a home in China was the best financial decision for their young family. While the pride of ownership is certainly a big factor (and especially in China these days), he could not see how buying a home at that moment would benefit his family finances. They already had enough for a down payment saved (an amount he did not reveal to me but indicated later in the conversation that with what they had saved they could pay cash for a home in the American mid-west). Once they started paying the mortgage, they would have less money month-to-month than when they were renting.
It still isn't clear to me what any one gains with owning their home in China, short of pride of ownership. The financial gains, if any, could only come after the property is sold, or once the mortgage is fully paid. Of course, I'm looking at this as an American, and the guidelines that normally govern these sort of transactions, and the concept of building equity, and its value, is something I don't know much about in China. I do know that a friend of a friend of mine in Shenzhen, someone who owned an bar of, ahem, some renown, bought two apartments in her hometown of Chongqing that she planned on leaving completely unfinished. She was not going to install walls, or flooring, or in anyway make them livable. She planned to sit on them and re-sell them, unfinished, because that was how she believed she would make the most money on them. In the first month of ownership alone, she gained 40,000 RMB on her investment just by increases in the market prices. She would make more money doing nothing than if she invested any further money in the properties.
So I am still not sold on the benefits of being a homeowner in China. It's possible that perhaps some high-income Chinese couples are also reconsidering. Like everything I have blogged on this topic, the evidence is anecdotal. A few weeks ago Bill Bishop related this on his Sinocism blog
A couple of weeks ago I had dinner with a friend of a friend who runs a Century 21 real estate brokerages in Beijing. I asked him about rentals in the high-end residential market. Historically Chinese did not rent in the more expensive residential complexes–why waste the money on a pricey rental when you should save and buy your own place?
But according to my dinner companion, and my own experience, that is changing. 12-18 months ago the majority of his business came from renting to foreigners. Now the bulk of his clients are mainland Chinese, paying higher rents.
He explores a few possible reasons for this, including some new regulations regarding purchasing new homes in Beijing, but I have to wonder if the dynamics of the real estate market for selling homes has gotten to the point where many of the conventional buyers (high income urban couples) see no point in owning. Renting means far less money up front, and less money paid month-to-month. A renter can maintain a much higher standard of living, if you are interested in having disposable income and what that brings (iPhones, vacations).
Comments
They just don't have the concept that property can be overpriced. As prices increase and people are priced out, that just creates more desire to appear 'rich' and own a house. It'll take a burst housing bubble before they'll learn their lesson.
The problem with owning in China is the 70 year lease hold that is cumulative. That is if you buy a 20 year old property then you only get to own it for a further 50 years.
The building quality too is shoddy. I remember seeing sunshine 100 when it was still being built and I looked for my first apartment after finishing uni and wanted to move from Haidian after getting my first job.
3 years later it looked like a ghetto.
That is the other problem. If your management office doesn't give a shit - or your neighbours don't give a shit that the management office doesn't give a shit - then your investment is at risk.
At the end of the day, the same money as a house in BJ buys a water fron property opposite the opera house in Sydney.
I would buy property - just not in China. Buy it elsewhere put in tenants and rent in China. Removes so much systemic risk that is out of your control.
The large number of people who purchase concrete shell apartments merely for investment purposes is one of the reasons why any property bubble pop would be so massively devastating to the average middle class Mainlander.
I has a very similar experience at Sunshine 100 in Beijing - the depreciation of many properties in China has always made me cautious. At the same time, though, I have heard a fair number of "success stories" whereby people bought at the bottom of the bubble and are now selling at the peak.
Here in HK, it seems to me that the obsession with home owning benefits nobody except the property tycoons. I cannot get my head around people spending 50% or more of their income on 25 year mortgages for 600 sq ft of property. And once the mortgage is paid off, then what? I know this is in some respects a cultural thing. Coming from the UK, the attitude to home ownership is quite different (or at least was when I was still living there!).
Of course the situation is very different for the speculators/investors. as always, it is the small players, those just looking for an affordable place to live, who suffer.
Good news at least is that the HK government with its land deals and business-friendly policies has finally priced out the one section of society it cannot afford (excuse the pun) to alienate - the middle classes. Be interesting to see where this goes.
This is further exacerbated by the lack of a precedent of a bubble bursting in the popular consciousness. Most people only get to see people profit from real-estate, far more than what they get from their ordinary jobs. The bubble have never bursted before, so people have faith it will not burst in the future. I see similar parallels in Sydney where renters are treated as serfs.