A real real estate bubble: how nagging mothers in law could hurt the Chinese economy

By Parker Barriball (JIN Magazine)
Updated: 2012-12-13

[Photos provided to China Daily]

Regardless of where you are from, the relationship one has with a mother in law is almost always a pain. They can nag, and pry, and make you feel you’ve descended into the seventh circle of hell in some cases. While this can be a strain on any marriage, it rarely has nationwide economic implications; unless you happen to live in China, where the mothers of potential brides vet would-be suitors on their possession of real estate above most anything else. I am not just picking on in-laws here, the Confucian ideal of the man as the sole provider is also contributing factor that reinforces the unwritten law that a man without a house is a man destined to bachelordom. While to me that sounds like an awesome way to dodge the marriage bullet, it has major economic consequences for China.

Real estate in China is a bit different from the West. Technically all land is owned by the state. For many years a home was not something one purchased, but was something one was assigned. Most housing was doled out by one’s work unit (danwei). In fact, up until the late 1990’s there was no monetized market for real estate on the mainland; the government giveth and the government taketh away. Most people in the 80’s were assigned housing by their danwei, according to one’s seniority, age, and family size. Housing was modest but essentially free and did not really enter the equation when courting a mate. Even with the rapid development and prosperity of many Chinese you will still hear older generations lamenting the simpler times of a China pre-Opening and Reform. While every grandparent is guilty of viewing the past with rose colored glasses, in China the change in lifestyle, including the pressures of home ownership, have been dramatic ones to say the least. As to the China of today, let’s check the numbers.

-The Chinese real estate market accounted for 13% of China’s GDP growth last year, that’s more than exports by the way.

-Between 1998 and 2008 14.4 billion square meters of residential housing space were constructed in China. For perspective, that is 160 times the residential space of the entire island of Manhattan.

According to HSBC, the value of real estate wealth in 2010 was USD 17 trillion, which is more than 3 times China’s GDP.

In the US the housing cost to income ratio (annual salary versus the cost of a home) is 3 to 1. According to JP Morgan, in China that ratio is 13 to 1. Do you have over a decade’s worth of income on hand so you can get married? Neither do many Chinese men. The pressure to marry is high, but so are home prices. Interestingly, rental prices have not kept pace with purchasing prices, they have remained relatively low. This means that the incredible increase in home prices is not being driven by a demand for housing per se, China does have plenty of space available to live in, to the point that many housing developments sent empty for years. The driving force rather is a confluence of other factors like societal pressure to marry into a home, and using real estate as a safe investment.

[Photos provided to China Daily]

The skewed gender and age demographics of China are creating hardship for those left outside of the real estate bubble, and creating a class of marriage ‘untouchables’. The male to female ratio is currently 120 males to 100 females; searching for a wife who, along with her mother, expects a home as a prerequisite for marriage is next to impossible. This ratio is expected to increase in the future as males are generally favored both historically and economically for their earning potential. The one child policy has also hurt males who do not come from families of means. The 4-2-1 family describes the typical Chinese family post-One Child Policy. That is, four grandparents, two parents, and at the center of it all, the one child. Generally speaking, Chinese grandparents (a demographic with more members every day) and parents are more than willing to pitch in and help their son purchase a home as he tries to find a wife. If a man does not have the advantage of independent wealth, or help from older family members, his chances of courting a mate fall drastically. At the bottom of the demographic heap are male laborers especially from the villages of China. Many females leave the village in search of work, or suitors, in the cities. From any angle, the cards are heavily stacked against uneducated male laborers who are choosing from an ever shrinking pool, and competing with a city male who may well come from 4-2-1 families. When it comes to social and family pressures about marriage, this demographic has become untouchable in the eyes of many Chinese.

Since Opening and Reform Chinese policies have been aimed at rapid development. A city can grow skyscrapers overnight. Now the government must manage the giant of this growing real estate bubble. While it has been a major driver of the economy, if prices falter, the affects will be felt nationally as well as abroad. China’s real estate craving increases the prices of everything from copper to concrete and any building material in between, if that bubble does burst in a big way, the ripple will be felt across multiple sectors. There have been attempts to control how many homes individuals can buy, but it has done little to slow the hunger for real estate investment. While this sounds like a setup for a huge bubble burst similar to that of the US, there are some key differences.

In the US, families were getting home loans for essentially no down payment, and at historically low interest rates. The government pushed banks to make lunatic loans to people who did not really qualify for them, and banks were not regulated properly and started selling toxic mortgage backed securities, and so the bubble grew and eventually burst. In China, families have much more skin in the game, meaning their down payments for a home might be as high as 40% or 50%, making a default personally crushing, and discouraging mass defaults that would make for systemic risk. Chinese leaders are hoping this will help to keep the bottom from falling out of the market. However, they are left with a very difficult choice; allow the bubble to continue to grow in the near term and hope for the best in the future, or, attempt to cool the market now and risk and overcooling of the economy more generally.

One does not always consider cultural factors when looking at economic issues, but in the case of the bubbling Chinese real estate market, one cannot really understand the market without some knowledge of the culture driving it. When my Chinese friends explain the social and family pressure involved with marriage in China, I must admit I cringe at the power that parents wield over their adult children still amazes me. While your mother in law may be a pain, at least she’s not helping to drive a bubble in your home country that could burst and devastate your economy.