What Investors Should Know About Real Estate & Inflation in China

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Just the past week, I traveled to three major cities in the Southeastern part of China: Macao, Shenzhen, and Hong Kong. I have previously lived in Shenzhen as a child and have visited both Shenzhen and Hong Kong in 1995, 2001, and 2007. It was my first visit to Macao. Nevertheless, the main focus of my trip, like my previous ones, was to eat cheap, authentic Cantonese food, which sadly rarely exists in America.

However, this time, the foods I was eating weren’t so cheap anymore. Furthermore, they didn’t taste as good as the food I’ve had in the past.

What happened?

I blame it on inflation.

The Effects of Inflation

Interestingly, in these three cities, we see the effects of inflation caused primarily by real estate. Often, we attribute the CAUSE of inflation to other things. For example, all central bankers around the world are calling for inflation. They believe the way to achieve such inflation is printing a ton of money and penalizing savers by making their deposits earn nothing (so far, I wouldn’t really say they are doing a good job because the true economy hasn’t really recovered). The true aim in central bankers’ drive for inflation is to wipe away government debt – not spurring the economy as they so often claimed. With inflation, the government (and also whoever owns debt) gets to benefit.

Related: An Overview of Real Estate in China – Scratching the Surface

On the other hand, because the financial markets in China haven’t fully developed into a globalized system as a whole, and because it is in the Chinese culture to own real estate, much of the newly earned money in the past decades has been plowed into real estate. And because land has been so limited in these three cities, the real estate prices have been skyrocketing to unimaginable heights.

So with obscene real estate prices, what do you think these new owners want?

Higher rents.

And with higher rents, what do businesses and renters need?

Businesses need to keep raising their prices; otherwise, they’d have to shut down. Or worse, they try to save costs by using inferior ingredients, the cause of many recent food scares. Employees now demand higher salaries because everything they earned couldn’t pay for the same stuff before and now they needed to pay higher rents to live. In those three cities, it is common to hear workers paying more than half their salaries just to pay for rent. And what about the elderly who are on a fixed pension? What will they do now?

A Rush to Buy Property

As a result, many people there are in a rush to buy properties (if they can afford it) because they fear it will only go up if they don’t buy it now. Resources from entire families are pooled together to put a down payment for a tiny apartment for the future generation. Women are expecting men to own a property before considering marrying them. And those who managed to buy have to scrape and save in order to get by. With cost of living so high, how are the locals expected to live?

Related: The 4 Biggest Risks that Threaten Home Prices Today

So life has been difficult for the younger generation in those areas because of the high costs of living. I am fairly certain if those protesting at Occupy Central in Hong Kong were given a choice between democracy and 50% cheaper housing, they’d gladly pick the latter.

But who got to benefit?

The beneficiaries of this inflation were the landowners and people who already owned real estate. Out of the massive inflation, many new riches were the Chinese people who bought real estate and held land many years ago, when it was still cheap. In fact, in Shenzhen, a big metropolis in China today, some fishermen who held on to their land became multimillionaires today. They are the ones who are spending all the money on handbags and cars and all the luxury stuff. Perhaps some were lucky, but some were smart. Nevertheless, holding onto real estate can help protect you against inflation. You may have to pay more for food and services, but hopefully, with a piece of real estate, you can protect yourself from an increasingly rising housing expense.

What do you think about rising home prices in China? How do you think it could affect real estate in the US?

Leave a comment below!

About Author

Leon Yang

Leon Yang is an active real estate investor in Las Vegas. He is a buy and hold guy who also likes to flip from time to time. His main passion is to traveling to the less traveled places and inspiring others to become financially independent through real estate.

6 Comments

  1. Edward Briley

    What you saw in China is no more than what has
    happened right here in the US. People held real estate for long periods of time. They thought they were invincible in their practice, until the 2007-2008 crash. I know several people that paid off their houses prior to the crash, and bought and built bigger and better, stretching their debts to the limit.
    They were paying cash for waterfront lots and getting a mortgage on them to build their,(so called) McMansions on those properties, turning around and selling them for a vast profit. Well, they got too greedy, and what happened? Many got stuck with these McMansions, not only the builders, but the suckers that bought them as well. The real bad part about this is that the age at which these people are and were at the time. This targeted the 50 to 70 year old person. Those houses they paid off, they sold, the mortgages on these McMansions, they were not able to pay. Many of these McMansions went on the auction block, for basically 20 cents on the dollar, in which many of them are for sale today, or coming up for sale shortly. ( I am waiting for this to happen to the stock market, because it will). This did not only hurt the people that did it, it hurt the young people many times over than it did them. It also hurt everyone that bought a home and had or has mortgage payments.
    We also know that in China there are large vacant cities, in which many Chinese own vertical air estates, that are really, or would be worth zero here in the US. If no one lives there, or will buy it, simply because they have a negative cash flow due to taxes, fees and upkeep.
    Now in my area there are hundreds if not thousands of lots that are for sale, that can be picked up for nearly nothing. I have thought about buying a lot or two and sitting on it for 10 to 15 years, however, because of the real estate taxes, and the upkeep on these properties would it be worth doing? Even if I got a lot for nothing and let one sit, in 10 years my cost would be at least $10,000, and who is to say that the lot would be worth that in 10 years time?
    My thinking has come to this, buy a dilapidated property, (better brick than not) flip it and try to sell it. If it doesn’t sell within 6 months, rent it, and try to sell it again in the future. I basically own a brand new property free and clear, with the exception of property taxes, insurance etc… Either way I make out, is this true or not? The way I see the real estate market today, is not to trust it in any way, shape or form, but profit on it if you can. This also should have taught the an investor not to put his or her eggs all in one basket. Best situation in today’s economy is for an investor to live in their mortgaged home, with a low interest rate. Own another free and clear, that they are renting and then invest in other properties, and flip them for a profit. Maybe a mountain (rural) property would not be a bad investment either. What ever you do, this is not a time you should be living above your means. Remember also, that other property you own free and clear, may also belong to the bank if they foreclose on your primary residence. It may give you some protection if you live in that property before the foreclosure on your mortgaged home, however.

  2. My take on it is:
    There are Macroeconomic and there are Microeconomics situation that can affect each individual RE markets. People will always need food/shelter. The question where are people moving from->to. The Macroeconomic can be very good but microeconomics can be bad (like Detroit etc.). You have follow the “sustained” jobs and demographic changes. Macroeconomic wise, US birth rate close to all-time low and with baby boomers retiring in hordes soon, the economic growth engine will not as great. Another aspect is, do not buy buy RE at the peak (getting multiple offers -> bidding wars). Remember, if your first offer is not “uncomfortable” to you, then you are over-paying and there is a opportunity cost for the next deal or next market downturn….So, keep your powder dry to get the next >8% CAP property.

  3. Tim Uittenbroek

    Spot on about the Chinese (and Asian) culture of buying real estate and plowing all excess cash into real estate. It’s the same story here in Singapore. House prices are out of control, and even though rents are extremely high for what you are getting, they haven’t risen to the extend house prices have resulting in extreme cap rate compression.

  4. Jerome Kaidor

    I believe the situation in China has resulted in higher rents for me in Hayward. Huh? How is that possible? Well, a lot of Chinese money is pouring into San Francisco, hastening the gentrification of that city. Or as we call it around here, “The City”.

    Despite draconian rent control, SF rents have shot through the roof, forcing people who are not well-paid professionals into Oakland and the Peninsula. This is forcing other people out of Oakland and the Peninsula,
    putting pressure even on my modest home town.

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