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How Overvalued is the Chinese Real Estate Market? – The Yield Blog


Chinese homeownership rates adjusted by socioeconomic and housing market characteristics are on average 18 percentage points higher than those of native white households.

Chinese Americans unaffected by China’s political economy still show an 18% higher home ownership rate while controlling for income and educational attainment: I think this is the best measurable and controlled evidence yet that demonstrates a cultural bias in favor of home ownership.

One commonly recited story, recently told to me by a friend who’d been to China recently, went something like this:

After China decided to reform university staff compensation, existing professors were given a choice: buy the state-sponsored apartments they’d lived in for free at a “market rates”, or go out and find their own homes elsewhere. Fifteen years later, price appreciate from these apartments have been so dramatic that professors who held onto the apartments made more from their apartment than what their non-apartment buying peers made, in total. Ladies and gentlemen, love is a powerful force, but FOMO is an even more powerful force. And that story is FOMO AF.

In actual China, families are massively overweighted toward housing with 74% of total assets in real estate compared to the US at only 35%:

Today, 90% of Chinese families own a home, while about one out of four Chinese households own multiple homes, according to research by China’s Southwestern University. One would think that, given the incredibly high existing home ownership rate in China and the relatively low immigration and population growth rates, that home prices should and would decline. But wait: Chinese have basically no outlets for their accumulated capital outside of real estate: an individual may only exchange up to $50,000 USD worth of RMB annually and corporate governance in China is the least shareholder-friendly structure I’ve ever seen: 2/3 of companies listed on the Shanghai Stock Exchange are state enterprises without independent boards.

From everything here, we can answer Part I: The housing market is definitely in speculative/overvalued territory, even after adjusting for zero property taxes: home ownership rates are already exceptionally high, while rental yields are as low as 1–1.5%, so most new property being purchased is literally speculative. Homes in Beijing and Shanghai are 2–3x overvalued compared to US cities and a price correction would likely involve 10–20 years of stagnant to declining home prices as wages grow high enough to meet existing prices.

Your mission, should you choose to accept it, is to find ways for Chinese consumers to use their low-return capital. Right now, that means selling luxury goods and travel experiences, but whoever can give Chinese investors a 4% USD-denominated yield will become a very rich man.

Total non-sequitur:
If you’re a particularly eagle-eyed reader, you’ll notice Dallas home prices-to-take-home pay is incredibly low: $200,000 for a 900-sq foot home looks like a steal, and to add on top of that zero state taxes and my initial reaction to this was to start looking for a job in Dallas (just kidding: Dallas sucks). Here’s the issue: Dallas property taxes are insanely high: at 3.6%, owning a $100,000 home would be like having a $100,000 loan that charges you $300 a month in taxes. Property values appear to be depressed as a result: Dallas collects only 10% more tax revenue per property than Brooklyn despite having 4x higher property tax rates.
For a long time, I thought the Reagan-era Laffer Curve was just a neoconservative talking point: “lowering taxes may increase tax revenue” seems fanciful, but perhaps property taxes are the perfect example! Stated a different way: when we tax the full value of an asset, rather than its net income stream, the value of that asset should decline proportionally (as if it were generating lower cash flow). In a really extreme scenario (20% property taxes), homes would be primarily liability-machines whose “rent” was mostly composed of an assessed tax obligation, and that home might well be worth nearly zero. The Laffer Curve exists! Make sure Rand Paul doesn’t find out about the Dallas home market or you will never hear the end of it.

Interested in reading more? Check us at at The Yield Blog.

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