All homes grow old. China will get used to it

Shuli Ren, Bloomberg

Chinese love new apartment buildings, my real estate agent told me last year as I was looking to buy property in Hong Kong. Seeing herself as an investment adviser of sorts, she was breaking down my exit options, such as flipping it to a mainland investor a few years later.

She was not just stereotyping. Hong Kong’s residential real estate market is seeing green shoots after the government removed all home purchase restrictions in February. Since then, mainland Chinese have bought as many as one-third of the new units offered by developers. Secondary home sales, on the other hand, remained anemic.

This preference is manifested elsewhere, too. In New York, luxury condos at Hudson Yards, which opened in 2019 as the largest private development in American history, were quickly snapped up by Chinese investors. They liked the neighborhood, even though it was a bit isolated from the rest of Manhattan.

You can’t blame them. Those who have grown up in the last century associate older apartment blocs with crowded slums, shared bathrooms, and bare-bones low-rises that state-owned enterprises hastily built. And who doesn’t like a brand-new complex that has swanky lobbies, greenery all around, and children’s playgrounds? Plus, before this property downturn, which began in late 2021, developers used to sell as many as 14 million units a year, spoiling households with choices.

But every economy matures. Almost three decades after the 1998 urban housing reform, which let in private home ownership, it is inevitable that, just like developed nations, China’s property market will be dominated by secondary home sales.

At the market’s 2021 peak, secondary sales accounted for just 22% of the total. They are expected to cross the 50% mark by 2032, and 74% by 2040, according to Morgan Stanley estimates.

Already, we’re seeing a spike in sales of pre-owned homes. Buyers are coming to the secondary market because they’re worried distressed developers may not be able to finish projects on time. Thinking that real estate prices have peaked, those with multiple homes are keen to divest and lock in profits. Individual sellers are also more willing to offer discounts, thereby luring bargain hunters.

This trend will only continue, at least in the big urban centers. Just like me, many homebuyers will have to toss aside their first preferences and accept a tradeoff between location and lobby.

Hong Kong, one of the most expensive real estate markets in the world, offers a good window into China’s future.

For those with limited budgets, the calculation is clear. If one wants to save commute time and not live in a pigeonhole, she has to go for older, pre-owned homes. They are much larger and a lot cheaper.

Mainland China is playing out the same way.

Preferences can change, too. Homeowners in Japan, for instance, also had a strong taste for newly built housing. Their attitude shifted over time.

Of course, what this means is that China can no longer expect property development to drive its economic growth (President Xi Jinping doesn’t want to anyhow), or land sales to fill local governments’ coffers (Xi has no replacement plan yet). But think of the glass as half full. A vibrant, liquid secondary market gives households comfort that the bulk of their wealth is not just paper money. Capital gains can be realized.

As for me, I settled into a 30-year-old building in Mid-Levels where neighbors are mostly at retirement age. It’s shockingly quiet and a short walk to the Bloomberg office. I’m betting that over time, Chinese will change their attitude, too. [Abridged]

Courtesy Bloomberg/ Shuli Ren