Why Chinese Cities are the Most Expensive Places in the World to Buy Real Estate
You may be surprised to learn the average price of a new apartment in Hong Kong is over $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, with prices skyrocketing to severely unaffordable levels. In fact, 7 out of the 10 most expensive property markets in the world are 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, even more 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 metropolitan areas show property per square meter being drastically more expensive in China.
The confusing statistic is that despite 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, demand rises significantly 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 is ingrained into 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 major Chinese cities, 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 rate of about 48%, this would mean this one particular market 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 drive economic growth and 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 have led to conflict as well. Although the average price of a new flat in Hong Kong is over $2M, these are not homes that 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 townhouses is being built and selling for $150M USD per unit. In comparison, the price for one of these homes would be able to build an entire brand new luxury high-rise in Montreal.
The government benefits from this behavior though. In the same neighborhood, a land plot on Mansfield road was listed recently by the city’s government for $6.2B USD, 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 the developers’ profit-seeking behavior is that it adds to growing income inequality. China has a very high gini-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 more multi-millionaires than any city in the world, even surpassing New York recently. It seems like the system set in place is unlikely to change soon, as low taxes and a business-friendly government have been accredited for high GDP growth.
Overall, the big question is whether the high prices are sustainable. Real estate is 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 years China’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 most expensive in the world and continue to rise.