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          Faculty & Research


          As pension once again becomes a hotspot topic in China, the 80s and 90s generations are pondering the choice between houses and other investment options for financial security after retirement. While many might choose houses, Guo Shuqing, head of the China Banking and Insurance Regulatory Commission, warned of over-reliance on property as insurance and frenzy real estate investments.

          Are houses wise retirement investments? Jin Li, finance professor and associate dean of Peking University’s Guanghua School of Management, exposes the illusion in the mind of many Chinese people:

          Why has housing investment become a mainstream retirement plan? As traditional Chinese saying has it, raising children is for the purpose of being looked after in old age. However, children are no longer reliable in the modern society, and people turn to money. Houses usually take up a lion’s share of people’s old-age fortune, while only a small portion goes to financial assets. Many families own more than one house. In China, houses are not only consumables but also a tool to store values. More houses, more security.

          Why have houses become a main tool for fortune storage? It is mainly the result of a lack of quality substitutes. China’s capital market is a latecomer, and investment channels and products are lacking. As a result, many citizens can only give their money to governments and enterprises at low returns. This is good for economic development but also makes people less likely to invest in the capital market. While governments are making efforts to actively expand investment channels and weaken the financial trait of the real estate industry, it will take a long time to see notable results.

          For investors, the real estate market has offered a better risk-reward ratio than many financial assets over the past decade. A downward risk of housing prices was virtually nonexistent. Even when strict policy forces prices to go down, a fierce rebound usually follows afterwards. Many people have thus been attracted to the property market. Figures show that more than 70 percent of middle-class Chinese’ fortune is in real estate. The newly rich are especially impatient with low-interest bank deposits and risky stock market. As a result, people rush to invest in houses despite repeated government warnings. It is only natural for capital to go where profits are high and risks are low.


          On the supply side, people’s real estate investment has been viewed as a significant factor driving China’s economic growth for a long time. Chinese households’ average depository rate is over 40 percent, and internal demand is relatively weak. Meanwhile, reliance on exports is unsustainable. As a result, investment in fixed assets, especially infrastructure and property, became the leading force driving economic growth. In the current austere economic situation, real estate is a key tool for stabilizing growth and ensuring employment, and the government thus does not have the heart to control the industry.

          The development of China’s urbanization and industrialization have been almost in sync with that of its real estate market. In the early period when other industries were relatively weak, the property industry already provided huge boost for China’s GDP and employment, helping people amass their fortune fast. Figures show that the median level of fortune held by a Chinese household reaches 800,000 yuan (116,000 U.S. dollars), and most of it comes from property. Fast fortune accumulation leads to a sense of security, social stabilization and consumption boost. As experiences from developed countries show, sound economy and rising capital values make people feel richer and more inclined to spend money. In addition, people voluntarily moving deposits into real estate instead of spending huge money on other markets in a disorderly manner means pricing fluctuations resulted from excessive mobility are prevented. All in all, China’s real estate industry has been playing a positive role in stabilizing economic development, enhancing people’s sense of security and offering a kind of mobility foundation in a relaxed monetary environment.

          For the government, it is an easy and primary method to adjust the economy through adjusting the property market. As manufacturing and other industries suffer excess capacity, it is natural to sell houses to people who believe that they can preserve values. However, this will lead to problems in the long run as there is a fundamental gap between fortunes amassed at an individual level and fortunes accumulated across the society.


          What is fortune? It is consumption power that is reserved for the future. Properties, jewels, antiques, stocks and bonds are all tools to store fortune. The value of these assets lies in them being converted into consumption power. For instance, one can get cash from selling a house and then buy goods or services.

          How much consumption power does a commercial house has? In other words, at a certain point in the future, maybe five or ten years later, how many goods or service products can one exchange with the consumption power from a house? The answer depends on the potential GDP at that time, or the gross products or services a society can offer. Potential GDP will rise slowly as time goes by. In the past several years, the rate at which Chinese people amassed houses far surpassed the GDP growth rate. This is the result of both large trade volumes as well as fast rising housing prices — prices in some regions soar even faster than the M2 growth rate.

          One scenario for an individual: if a household invests 40 percent of its annual incomes in real estate every year for the purpose of converting it into elderly care services after retirement, how much real estate fortune will this household own after 30 years? Given that official policy and prices remain at the 2019 level, property value increases by 7 percent annually (the actual figure was much higher in the past decade) and doubles every ten years. If a household has 800,000 yuan now, the answer will be 6.4 million yuan.

          What will the situation be like when, after 30 years, every household convert their property investment into spending power? Severe supply-demand imbalance is highly likely. At that time, tens of millions of people will have retired every year, and a huge amount of houses will be converted into spending power. It should be noted that many of these houses are second-hand. If real estate is still a pillar industry for China then, more additional first-hand houses will be built. Will there still be a huge property demand?

          What if each year these tens of millions of people spend only 10 percent of what they invest in houses on beds and care services in nursing homes — let’s say, 20 million beds and 10 million care staff as well as medicines and food? Only the gross output provided by the entire society don’t increase as fast as houses for investment, and it is not enough even if all these goods and services are up for grab. Then what? The highest bidders will get them. Families in urgent need of these goods and services will be willing to spend more money on them. Ultimately, the actual spending power houses can afford will be discounted. Alternatively, we can solve this the rough way through various administrative methods such as imposing quotas or lottery purchases.

          In a word, no matter how we control housing prices, it is always possible that when these houses are converted into spending power, all the goods and services available simply cannot match up such a huge demand. Consequently, the property for pension plan will be severely watered down. Those thinking that buying one house will be enough to live in a nursing home for ten years will eventually find that they will have to buy more. What will one do if this happens?

          One’s first reaction might be to save more money so as to buy more houses. But does it really work that way? If everybody thinks like that, it will make no difference. People will be in the same quandary if the gross output of a society is still the same.

          Thirty years later, you have this house that is brick and mortar, but while its accommodation value remains unchanged, its potential to be exchanged for other goods and services will be severely limited since the gross output cannot meet aggregate demand. Thirty years later, one needs a bed in a caring home and its service much more than a big house.

          It is a serious paradox. People’s buying power from housing investment in general will be capped as long as gross output on the supply side remain unchanged. If we cannot boost future output of goods and services through supply side reform, all efforts to seek better retirement care from housing investment will end up in vain. It is not unlike the paradox of thrift in economics. An increase in autonomous saving in a bid to boost individual fortune will lead to a decrease in aggregate demand and thus a decrease in gross output which will in turn lower total saving as prices soar.

          People are even more obsessed with property investment nowadays, hoping to solve their retirement insecurity, preserve fortune in the long run and even pass it on for generations to come. Based on the above analysis, it might be only a fantasy. Houses’ capacity to store value might be alright for five or ten years, but not so much after 20 or 30 years.


          Even though property is unlikely to become an ideal tool to preserve fortune for medium and long term, people are still converting huge amount of valuable resources into houses. It’s almost modern alchemy, albeit with concrete as base materials instead of lead. We expect these golds to support elderly care 30 years later and go on to future generations, only to find that they are not endurable at all. The long-term value of houses and their potential to be exchanged for goods and services are far more limited than people think. For individual households, property investment might be an effective way to store fortune and support retirement care, but society-wise, it would be a terrible thing if every household does that.

          Maybe one buys houses as a hobby or for practical accommodation reasons. It is alright as long as one does not plan to convert them for elderly care decades later or knows clearly that these houses will not be that valuable then. It’s the same with cars. People won’t expect them to increase in value decades later because they are not rare and nobody will bid highly for them. What’s troubling is that people wrongly expect houses to be worth more 30 years later.


          Meanwhile, many reason that housing prices will keep rising because people have rigid demand to live in bigger, better houses. For instance, a three-member family in Beijing live in a house of 60 square meters spend six million yuan buying another 60 square meters at a price of 100,000 yuan per one square meter to improve living conditions. If the government announces to freeze housing prices at the current level to stabilize the market, will this household still go on with the purchase? They might consider the cost and rather spend the money on financing products. With a five percent annual return, they will gain 300,000 yuan every year, while the average monthly income in Beijing is only 10,000 yuan. Under these circumstances, this family might put off their need for a bigger apartment and pay attention to other demands. Seen this way, this rigid demand for living is actually mixed with a sense of investment.


          Are there better options if property investment is not enough for retirement or long-term fortune preservation? Tangible investments. In the U.S., households with net worth of over one million dollars invest no more than 20 percent of their fortune on real estate. In comparison, Chinese middle-class spend nearly 70 percent on property.

          What assets do these American households own? About 70 percent in industrial and commercial enterprises. In other words, wealthy Americans’ fortune is mainly characterized by its financial trait, while financial assets only takes up less than 20 percent of wealthy Chinese’ fortune. The rest is in real estate.

          Granted, this comparison is not entirely scientific since China’s middle-class is different from the high net worth households in the U.S. These Americans occupy the top of the pyramid and mostly have their own enterprises. However, the high net worth Americans in the lowest tier do not have their own companies but still retain a huge amount of financial assets in the form of stocks and bonds of other people’s enterprises — in other words, investments in the real economy.

          Why don’t wealthy Americans own many houses? For American investors, housing properties for investment do not offer better risk-reward ratio than other investments, and financial assets are appealing enough in this regard. China’s capital market is still in its early period, and financial assets with value-preserving functions are still underdeveloped. That is why Chinese households have to rely on property. It is sad, since behind all this is an immature financial market.

          On the contrary, the U.S. capital market provides ample quality assets as options, including stocks, bonds, private equity, venture investment and other types of investments with potential large and stable gains. In such an environment, investors do not need to turn to houses to feel secure just because they are brick and mortar. In actuality, this sense of security might be only a mirage since shrinking spending power means houses cannot effectively preserve or increase values.

          Investment in the real economy will bring enduring potential GDP boost to the society. In a country with mature markets, private capital going into the real economy — instead of part of the real economy entering real estate and other paper economy fields — is a key factor driving GDP growth. Re-investments in the real economy will effectively enhance potential GDP and boost gross output in the long run.


          One might ask: don’t our property investments also boost GDP? Yes, ordinary people spend their hard-earned money on buying houses and this demand drives the construction of more houses, and GDP will increase in the process. Unfortunately, decades later these houses will only be valuable in offering accommodation and their capacity to be exchanged for other things will be limited. Society-wise, this is at the expense of enterprises, especially those in high-end manufacturing and service sector, that could have made better use of the resources that go into empty houses. Ironically, medical treatment, bio-pharmaceutical technology, cloud computing, artificial intelligence and other fields that will prove crucial for elderly care and the country’s long-term economic potential would not have had enough resources for development either.

          Therefore, great efforts should be made to develop the capital market as well as investment channels that directly benefit the real economy. For microchips, operation systems and other long-term, high-tech projects that require huge amount of fund and long cycles, it will be beneficial to offer some fund products for people to purchase. This way, people will have more choices to invest their capital in the real economy and also enjoy reduced investment risks. Their gains after 20 or 30 years will be more reasonable and sufficient for elderly care purchases.  

          ? 2019 Guanghua School of Management Peking University

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