China’s property sector must downsize if there aren’t enough marriages to save it

The decline in the number of marriages, the most significant driver of property demand, leaves China looking at a massive inventory that will take at least 10 years to digest
Without downsizing and reforms, the property industry will become a zombie

Andy Xie

Published: 12:28pm, 22 Sep 2022

Why you can trust SCMP

China’s property bubble is deflating quickly. The vast industry and local governments are trying to revive it. But it won’t work. The sector is beset by developers’ financing woes and a massive supply overhang amid high household debt, a property affordability crisis and, crucially, a collapse in the rate of marriage.

The government can ease developers’ financial pressure and cut debt costs for households. But it cannot revive the marriage rate. The property industry must downsize by at least half if it is to attain any stability at all.

The industry has enjoyed an incredible combination of huge volumes and high prices for so long partly due to the unique dynamics of China’s modern marriage market – men looking to marry were expected to own property, preferably debt-free.

The man’s parents and grandparents tended to pitch in, often exhausting their savings. The prospective bride’s family, free of financial pressure, would often push for purchase regardless of the price. Debt was sometimes used to plug the cash shortfall, borrowed under the names of the groom’s parents. Such demand has been a pillar of the property market.

But marriages plunged to a record low of 7.6 million last year, roughly half of the peak of 13.5 million in 2013. That year, 1.3 billion square metres of new residential properties – roughly 13 million flats – were sold, household debt was low at 16.6 trillion yuan (US$2.4 trillion), and grandparents were rich in savings. By last year, household debt had ballooned to 71.1 trillion yuan, over 140 per cent of disposable household income, and the grandparents had been bled dry.

In China, grooms historically bear the financial burden of the wedding and the matrimonial home. This is tied to the all-importance of the family name and the expectation that men carry it on at any cost. Chinese society has emphasised the importance of the family name for thousands of years; emperors used to bestow the imperial family name on their subjects as a reward, making it all the more precious.

The family name has also been a most powerful force for social order. No matter how hard life was, a man was motivated to try his best, find a woman and sire sons. For a wealthy man, this used to mean finding several women so as to have many sons – also a sure way of dissipating the wealth eventually.

This stacks the cards against men and reduces women to essential tools in the enterprise of continuing the family name. But it also gives the prospective bride’s parents the right to seek compensation – the caili or bride price. In the 21st century, this demand has morphed into a matrimonial flat. The belief that a marriage mainly benefits the man’s family also shifts the financial burden of acquiring a matrimonial home to his family.

The Chinese property market has been riding on this phenomenon for a decade and a half. But when even the grandparents have turned out their pockets, one simply cannot go further.

08:07

Cheap housing but few economic opportunities for young Chinese in city along Russian border

As marriage became more expensive, demand plummeted. Bachelors began to proliferate and this triggered social change. People started to challenge the established ideas of marriage, masculinity and financial responsibility. Why does being born with a Y-chromosome have to doom men to massive mortgages that often yoke three generations to debt?

From 2013-2021, 14 billion square metres of property was snapped up, worth 116 trillion yuan and averaging 15 per cent of gross domestic product. The urban home ownership rate is already at about 90 per cent. As the economy stagnates and the yuan weakens, investment demand is also evaporating.

Marriage is the only significant driver of demand for property. With about 7 billion square metres in residential property under construction and unsold, if every marriage leads to a property purchase and the number of marriages doesn’t fall further, it would still take about 10 years to digest the inventory. Given that both assumptions are wildly optimistic, and that land banks, meanwhile, will only add to the inventory, it will be a long slog before the market returns to stability.

07:21

Growing anger over China’s unfinished ‘rotten tail’ buildings: ‘We really need this home’

Yet neither the industry nor local governments seem willing to give up on the bubble. Land sales and property taxes have averaged close to 10 per cent of gross domestic product in recent years. The financing cost of mortgages and the construction of residential property is probably worth 7-8 per cent of GDP, and paid mostly to the state-owned financial system, with some leftovers for shadow banks. With so many mouths at the property trough, there must be many powerful interests lobbying the central government to revive it.

There will be many efforts in this direction, but none will have lasting impact. Most developers and small cities are simply not viable. The property industry is becoming a zombie. So are many local governments.

While the potential cost of allowing the property bubble to naturally deflate would be huge, China’s economy can come back through restructuring to generate even more productivity gains. Non-governmental consumption can be boosted by 10 percentage points – or more – to 50 per cent of GDP. Investment will shrink but can be deployed more efficiently.

Urbanisation efforts, for example, should be concentrated on developing megacities. Most small cities are not viable in the long run anyway. Future generations will not want to live there.

Unfortunately, China is unlikely to restructure its economy. A consumption and megacity-led economy is not compatible with the political system. The economy is defaulting to an export-led model for now.

As long as the global economy remains standing, so will China. Only a total collapse of the global economy will trigger real reform in China.

Andy Xie is an independent economist