China's middle class and the housing boom

China's real estate market heat is uneven. In October, among 70 large and medium cities, there were 27 cities’ new housing prices rising. Shenzhen had gained 40.5% which reached the highest increase. Most of the third- and fourth-tier cities’ housing prices were declining.  

The declining tendency of housing prices had been a while. In order to stabilize housing prices, most of the cities cancelled the limitations on property purchase except Beijing, Shanghai, Guangzhou and Shenzhen. And the Central Bank also relaxed restrictions on mortgage policy in the end of September 2014. By the beginning of this year, the first-and second-tier cities’ housing prices began to rise, and Shenzhen emerged explosive rise. This made the differentiations of the real estate market become more and more severe.  

The majority of China’s household wealth is invested in real estate. According to the research from CHFS hosted by Gan Li, professor at Southwestern University of Finance and Economics, the proportion of the middle class wealth in real estate was 79.5%, while the financial assets took up 10.8%, in 2015. Comparing with the research data from CHIPS hosted by Li Shi in 2002, the proportion of real estate value in Chinese household wealth was still rising. These all showed the extremely high housing ownership rate. Professor Gan’s research indicated China’s housing ownership rate was as high as 89.68% in 2013, while the world average level was only 63%. Even considering the East Asians were more homesick and cared about real estate, it is only 60% in Japan.

The rich buying a house is not unusual and the real poor cannot afford to buy a house. There are so many channels to allocate assets, but why does the middle class prefer the property? The general explanation is that China's capital market is underdeveloped and ordinary people lack a good investment channel. Even if people can invest in financial assets, the past 10 years of experience shows that the investment income in commercial housing is far more stable than the profit of stock market. However, there are still huge property sales in some second-and third-tier cities whose prices have been in a state of progressive slight decline. Why?

Firstly, the house is the discounted value of public goods. China is still practicing the strict household registration system; therefore, if people want to enjoy certain public services, they must have stable residences. And people with self-owned housing have advantages in the acquisition of these qualifications or public services.  

Secondly, due to the neighborhood schooling policy, self-owned property is a necessary condition for good school district. So prices of school-nearby house remain high. This year, in the housing markets of Shanghai and Beijing, school-nearby house prices made the biggest rise.

And besides, we also need to look at the reason why the middle class likes to allocate the wealth in property through the perspective of social transformation. The research of Wei Shangjin et al shows that the birth control leads to gender imbalance. In marriage seeking, there are more men competing for fewer women. And therefore having their own house or saving the down payment for housing purchase have become a tacit rule. Wei think in 35 major cities across the country, nearly half of the rise in housing prices can be explained by the phenomenon of gender imbalance. This coincides naturally with a folk joke: "mother-in-law pushed up the housing price".  

Mother-in-law favors property, because in the transformation of the society, a large number of farmers are becoming urban residents and China's existing social identity recognition and reputation mechanism are no longer effective. Commercial residential housing not only can make man's family income, wealth and other power clear, but also effectively increase the cost of divorce or offer women life support after divorce.  

Even without considering the factors of marriage, the new immigrants of big city also need a house to prove themselves and show their strength to other people. To a certain extent, the ownership of the commercial residential housing is the most important and simplest reference to the personal social reputation and social status. This also means that if the processes of the China's urbanization and the scale expansion of large cities are not stopped, the middle class will still prefer the real estate as the main means of assets allocation.  

Published in the Beijing news | 2015-11-24