Monthly Archive: November 2009

Of boom and bust

I’ve been watching the housing market in China for a while and reading about the conflicting predictions (and the supposed reasons supporting these predictions) of the direction of the price. I tend to think that, based on the ridiculously high price-to-rent ratio alone, this is a huge bubble waiting to pop, but would love to be proven wrong.

My simplistic thinking is as follows. Economists like to think in terms of long-term equilibrium and the short-term distortions that depart from and return to the equilibrium. For consumers, the long-term choices are: owning a residence versus investing the same amount of money and renting a residence using investment income. The long-term equilibrium should be that the consumer is indifferent between the two.

Some may say that Chinese families prefer to own rather than rent. Notwithstanding the fact that currently “land ownership” under Chinese law is equivalent to a 70-year fixed-term assignable lease, I am willing to discount the rent option to account for the preference, but that does not explain the large disparity between the price to purchase and the price to rent we currently see in the housing market in China.

Some argue that there’s this “inelastic demand” for housing and limited supply. They overlook the fact that the only thing “inelastic” about demand for housing is that people need basic housing, whether by owning or renting. An example illustrates the point. It is indisputable that food, like housing, is a basic necessity, and there is a certain element of “inelasticity” to it. But the inelasticity ends at the basic food supplies, which can be purchased from the market as needed. No one would argue that the demand in higher quality food (e.g., organic food) is inelastic, or that to ensure a constant supply of food one must own the land that produces it. Same with the housing market. Demand for basic housing is inelastic, but demand for housing in a desirable neighborhood or a convenient location is not. And people can fulfill the need for housing by purchasing piecemeal from the market (i.e., renting), much like going to the food market every week for food supplies, without owning the piece of property that produces the commodity.

Yet some say buying a residence is a good investment. I think this may be true for those whose investment portfolios are sufficiently large and diversified. But for someone who needs to invest his life savings (and those of his parents), i.e., many prospective buyers in the housing market in China constituting the so-called “inelastic demand,” I am not sure if putting all one’s eggs in one basket is a wise decision. Most people would never borrow a large sum of money from the bank to invest solely in the real estate sector of the stock market, yet many are willing to do exactly the same and invest in just one or two properties, the value of which is affected by even more factors and subject to even higher volatility than the real estate sector as a whole. It’s a risky investment that may pay off handsomely, as has been the case in the past several years, but the tide can turn quickly, as we’ve seen in the real estate markets and stock markets elsewhere.

The only thing left, I think, that would explain the high housing price and relatively much lower rent, is speculation. And when the market goes up on nothing else but broad-based speculation, it’s called a bubble. People speculate that the housing prices will go even higher, so they now buy and hold in the hopes of making a profit later by reselling. And when they buy, they inflate demand and drive up the price, so even those who do not buy for speculative purposes and has no need to buy immediately now feel an immediate need to buy before the price goes up too high, further inflating the immediate demand (at the cost of weakened future demand).

Separately, I’ve been thinking about the legal market in China lately. The job market there (and here in New York) now is very much different from when I started law school and interviewed for jobs. But for Chinese law students here in the US, I think the outlook is even better than before.

Again, look at this from a supply and demand perspective. Demand for U.S. trained, bilingual Chinese attorneys who are willing to commit to Asia will only increase over time as the cross-border transactions increase in both number and complexity. Supply will remain low because of (1) the language barrier, and (2) the cost of the legal education, neither of which is likely to change in the foreseeable future.

Language. Law school and law firm work is language-intensive. I think the Chinese students who are most likely to succeed in law school are the English majors (or those who have a far better command of the English language than the average non-English majors) and those who have lived in an English speaking country for some time. I have seen non-English majors coming directly from China doing very well in U.S. law schools, but they are the rare exceptions rather than the rule.

Cost. Three years of JD now cost at least 180k without financial aid. (One year of LLM is less expensive, but the LLM degree is also a lot less marketable.) This is still a very large number for a lot of Chinese families. The AccessGroup loan program that used to be available to foreign law students without US residents as co-signers was terminated recently. So even fewer Chinese students can afford (or borrow enough) to attend law school than before.

I guess there is a lot of truth in “buy low, sell high,” after all. The housing market is high, the legal market is low. Thinking of which one to buy into and which one to sell out of?

Some updates

Only one more week of paternity leave to go. I thought I’d provide a few updates of what I’ve been up to lately.

New recipients of the Almon-Wang Scholarships at Nanjing University have been selected and will be notified by the school administration shortly. Next year I hope to expand the program to more students, perhaps one more college, or in other ways that can help those in need and/or reward those who excel. If any of my readers would like to join the effort or has any suggestions, please drop me a line at littlenorth at gmail.

Inexplicably, I find myself looking at yet more watches and bought two more. These are nowhere as expensive as the previous ones, but both are very special.

Casio Aviator Watch. Solar powered, radio-controlled timekeeping.

Sea-gull China Air Force 1963 Remake, manual chronograph. I’ll replace the straps with some nice leather ones and it will be a classy dress watch.

And if all goes well I should be able to celebrate the Spring Festival back home this year.