Even in the West, people have a let’s call it special relationship with real estate than with other asset classes. Since we’re talking about an investment you cannot help but be exposed to on a daily basis (since you… well, live there), it should come as no surprise that a wide range of emotion-driven behaviors which technically have no place in the investment world are present.
From getting overly attached to your home and not selling when the risk/reward ratio is asymmetrically in your favor to making acquisitions based on emotional rather than reasonable arguments, feelings and real estate tend to go hand in hand.
However, China has a very special way of taking things to the next level, with some real estate investments being genuinely in the realm of the absurd. From ghost cities full of apartments Chinese people “invested” their hard-earned money is to just overall exuberance when it comes to real estate that is significantly above average… why is this happening?
In no particular order, here are a few reasons:
- The cultural dimension, with owning your own home being considered the foundation of your journey toward starting a family. In many places in the West, a lot of attention is given to other aspects such as job mobility, which results in people feeling less pressured to buy a home. That, however, is certainly not the case in China. Think of it as peer pressure multiplied by 1.4 billion
- Perceived lack of options. Compared to people who live in more developed nations, a lot of Chinese citizens are just not all that sophisticated when it comes to their investment choices. They prefer to stick to an asset class they know has been around since pretty much forever (real estate) rather than venture into the unknown and dip their toes in asset classes which are anything but a conversation point in their social circle. On ChinaFund.com we mention pretty frequently that excellent investment opportunities abound, yet ironically, it might take more time than people realize until the Chinese themselves come to this conclusion
- Fear due to past volatility/losses. While there are crashes in the Western world as well, volatility tends to be on the higher side in China. For a good investor, this is actually an excellent opportunity but for the average person who remembers that one time his relative lost 70% after a market crash, it’s a major cause for concern
- Urbanization, the pace of which has been remarkably accelerated since 1995. With more and more people being attracted to the various opportunities urban areas put on the table and the authorities themselves nurturing the urbanization process, it becomes a simple issue of supply and demand on a very large scale. When you have millions of people competing for what can only be considered comparatively limited real estate, the results should not surprise anyone
- Access to capital. When the GDP of a country goes up more than 10-fold in less than 20 years, a lot of people who didn’t have all that much access to capital and would have never hoped to have such access anytime soon… well, do. And what tends to be the common denominator when it comes to the things people like to do when they all of a sudden have access to a lot of money? I’m sure you’ve guessed it
… these are just five reasons why the relationship of Chinese citizens with real estate tends to be of a fairly special nature. At the end of the day, it’s a fairly logical combination between culture, possibilities and human nature. With China becoming increasingly wealthier as a country and the various consequences that derive from that (from urbanization to increased access to capital), it should come as no surprise that assets which the general population tends to have a bit of a love story perform remarkably well. It’s as simple as that.