Glorious houses

March 26, 2017

People have been talking about it for the last ten years: China’s ghost cities, the booming real estate market, and the inevitable bubble that the market creates. Wealthy Chinese often own a double-digit number of apartments. My aunt and uncle, not exactly wealthy Chinese, own six homes.

For some reason, every time I go to China, I find myself in the home of a relatively well-off government official or businessman. Their homes often look like the interiors of Macau casinos: grandiose, opulent, and above all, fake. Stone friezes, 19th-century style leather furniture, and marble floors give old-fashioned luxury hotel vibes.

To the socialist American liberal, these sorts of homes reflect a cultural inclination to flaunt wealth. They represent the sins of capitalism infiltrating the Chinese economy. Greed and lack of charity lead to fancy houses. Surely, there is some of that.

But there is another explanation. In China, real estate is the alternative to savings and the stock market. In America, there is no real concern about the volatility of the US dollar. I can put my money in a mutual fund or ETF and be reasonably satisfied with the safety of my investment. On the other hand, in China, with the unpredictable fluctuations and current depreciation of the RMB, it’s hard to be safe in an equity investment. Moreover, isn’t as much to be gained in the Chinese stock market. So real estate serves as a physical alternative to equity investments.

Why is fancy real estate a favorite financial vehicle for wealthy Chinese?

  1. The Chinese stock market, and the RMB, are unpredictable and always fluctuating based on the feelings of the Chinese government. There is a fear that the RMB’s real value is drastically different from what exchanges say.
  2. There is some sense of security in the fact that the apartment, being a physical entity, will always have some value.
  3. The best way to ensure that your apartment retains its value in the much-anticipated real estate bubble collapse is to ensure that it occupies a certain niche in the home market. The fancy-home market seems like a good one for many, especially since as the number of wealthy Chinese increases, the demand for these homes increases.
  4. While the market is on the up and up, apartment owners can get handsome dividends from rural migrants, and city dwellers moving up the social ladder.

Thanks Kerry for the info on Chinese markets (She knows a lot more about this than I do).

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