Divorce, not marriage, now fueling China’s property bubble in Shenzhen

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China housing Sept16China’s housing market has always been about marriage since it began in 1998, until recently that is.  The reason, as I noted a while ago, is that:

70% of China’s women regard “housing, a stable income and some savings” as vital for any man wanting to get married.”

Women have the upper hand when it comes to accepting marriage proposals, as there are now 33 million more men than women in China.  Sadly, the 1 child policy meant that parents often selected girl babies for abortion – even as recently as 2004, there were 121.2 boys born for every 100 girls  .In the absence of a proper social security safety-net, fathers of the prospective bride have often focused on the man’s material prospects in terms of housing and finance.  His personality and morals have been seen as less important, as the China Marital Status Report described.

It is also easy to forget that housing was all state-owned until 1998, and still is in most rural areas.  Urban housing was built and allocated by the state – and there wasn’t even a word for “mortgage” in the Chinese language.  Not only have home-buyers never lived through a major house price collapse, they have also had few other places to invest their money.  Capital controls have made it difficult for ordinary people to invest outside the country, and they have been frightened away from the stock market by the bubbles that have occurred.

By comparison, bricks and mortar have seemed “a safe bet”.  And certainly, one unusual feature of the market is that mortgage levels are relatively low:

  Even today, a minimum deposit of 20% is required for a mortgage, and around 15% of buyers simply pay cash
  Homeowners have made major gains since 1998, as prices have doubled every few years in Tier 1 cities since then
  So many family members are able – and happy – to lend money to buy a home when a boy wants to marry
  They will lend all or most of the money required, usually on the basis of the gains they have made in the past

China’s housing market isn’t therefore, vulnerable to the same problems as created the US subprime disaster of 2008.

Its problem is that buyers have only ever seen good times, Everyone now expects prices to continue to rise forever. Speculation has become dominant, as people have never known prices to fall.  Property developers are also happily building more stock, even though the market is already vastly over-supplied.  China currently has around 4 years’ worth of unsold housing stock, and inventory of “nearly-complete” homes is often not included within this figure.

Central and provincial governments have tried to slow the rises.  In the Tier 1 city of Shenzhen, for example, they introduced a rule that a family could only own 2 homes.  But instead of reducing sales, couples have simply divorced in order to get round the restriction, as financial journal Caixin reports:

“About 45% of homes sold in Shenzhen last year were bought by people who had avoided curbs on home purchases by filing for divorce, according to a study by the Shenzhen branch of China Banking Regulatory Commission. Investigations found homebuyers often use sham divorces and falsified pension and medical insurance plans to make them appear eligible to purchase a new home, a person with knowledge of the study told Caixin.

“The number of couples who actually got divorced was over 20,000, the local banking regulatory body said, but it did not say how many filed a divorce in order to get a new home.  Under a regulation in place since March 30, 2015, a family can buy only up to two homes in Shenzhen. In addition, buyers are required to come up with a 40% down payment for the second, compared with a 20% down payment for a first home. The regulation began amid a housing boom, particularly in Shenzhen.  By filing for divorce, a couple can circumvent such restrictions as each of them is considered members of separate families under government rules.

“More than 66,000 new homes were sold in Shenzhen last year, up nearly 60% from 2014, while housing prices soared by more than a third in the same period to over 33,400 yuan (US$ 5,000) per square meter, official statistics show.  More than 20,000 couples in the southern city filed for divorce last year, up 46% from a year earlier, government statistics show. However the local banking regulatory body did not say how many of the couples simply registered a divorce in order to buy a home.”

Logic suggests reality must overtake the speculation at some point.  Yet China’s property market has defied logic for so long, nobody can be sure when the bubble will burst.  But certainly, the rush to divorce in Shenzhen, in order to buy even more homes, suggests we are now getting quite close to its end.

 

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