The past few days I have been having so many interesting discussions with taxi drivers that I decided not to buy myself an electric scooter. Chatting with taxi drivers is probably the fastest way to improve one’s Chinese – they love to talk.
As part of my continued amazement of the sheer amount of new high rises in Ningbo, I keep coming back to this topic in my conversations with the local taxi drivers. In my latest discussion, my taxi driver proudly told me that he was the owner of an apartment in one of the new high-rises.
Sensing my scepticism, Chen assured me that he could only come up with the minimum down payment of 30% (for a 2nd home its 50%) and took a loan for the other 70% equivalent to just over 700,000 yuan (US$100,000). It’s a 30-year mortgage, he told me, and his monthly payments are just over 3000 yuan. Doing some math back home, I figured out that this would be equivalent of a 3.5% fixed mortgage with no property tax – a fantastic deal by any measure.
“3000 yuan?” I said with my head slightly tilted, “how much would the rent for a place like that be?”
“About 1200-1500 yuan”
“So why don’t you rent a place? You would save a lot of money!”
“See, we Chinese people and you European people, our thinking is very different. You cannot find a wife in China if you do not own an apartment. We have to buy.”
“So you think it’s a good investment? You think the price of your apartment will still go up?”
“Yes, but not by much. Maybe a little. It cannot go up much more. 20,000 yuan per square meter is already very expensive. If it goes up more, no one will be able to afford it.
You know, the people who bought the apartments in the beginning for 9,000 yuan per square meter, they are actually thieves. But you can only do that if you already have a lot of money”
“So what if you are not sure whether you will still want to live in the same place for more than a short period of time? Would it not make sense to rent an apartment?”
“No, your wife would not feel secure. You will definitely not find a wife.”
The decision to buy an apartment in China does not make any sort of economic sense, its purely cultural – unless you are one of the initial investors, of course. So, if you are not bound the cultural constraints, it will in most cases be the better decision to rent rather than buy.
{ 2 comments… read them below or add one }
Have to say, i love you blog. What you have write in this entry is absolutly true. However, these purely cutural decisions bring unintened economic consequences. People have less disposable income if taking their morgage into account. I personally believe this is the leading cause of the inadequate domestic demand for good/service. In this economic background, increase export became increasingly important for domestic manufacturers because they need to keep the factory running. And by doing so, the China’s multilateral trade deficit is being built up. Liquidity is limited and Central bank can do nothing but to increase the interest rate to halt the investment. But according to the microeconomic theory, the domestic spending will, again, further decline as a consequence.
Ideologies drive poors to buy a house that they can barely afford, and encourage riches to invest in a way they can benefit. As long as population growth rate is positive, there will be just more people wanting to buy properties every year.
Correct me if i am wrong.
Thank you for your comment!
I think the central bank here has very limited wiggle room. They can not increase interest rates much more. If they do so, the amount of hot speculative money flowing into China is just going to be too overwhelming. After all, who can imagine a better investment than a high interest bond where you a guaranteed that the currency will also significantly appreciate.
As to the housing prices, it seems like this is really what keeps the economy running at high tilt! Everyone is on the edge, scrambling to make more money to pay for a mortgage. Its one gigantic rat-race. The real question is what would the consequences be when housing prices stop rising? What can keep the economy going? Certainly not exports, with wages rising rapidly and the RMB appreciating. It find it quite worrisome.