An unfavourable ratio of young men to young women could explain simultaneously skyrocketing housing prices and rising home ownership
Housing prices in some cities in China have increased more than tenfold in the past decade. They appear to be rising too fast relative to the growth of income—the home price-to-income and home price-to-rent ratios in major Chinese cities are much higher than their counterparts in developed countries. Moreover, China now has one of the highest homeownership rates in the world. These trends have received great attention from policymakers, academics, and ordinary people (e.g. Glaeser 2017). What is driving them?
In Chinese cities, people are required to make a down payment equal to one third of the housing price to buy their first property—much higher than in many developed countries. The down payment requirement for second homes is as high as 70% in many cities. In the absence of formal credit in rural areas, people have to finance home construction using their own savings and by borrowing from friends or relatives. In principle, such a stringent down payment threshold and a less-developed financial system should inhibit homeownership and home price escalation. Instead, the opposite is occurring. In a recent article, we offer a new explanation to this puzzle (Wei et al. 2017). The rapid rise of home prices in China can most readily be explained by the drive to attract a prospective spouse.
Due in part to the one-child policy, there were 120 Chinese men for every 100 Chinese women as of 2005—in some provinces this ratio is as high as 130 to 100. If we assume everyone desires a traditional male-female long-term relationship, this means that there are some 30 million Chinese men who might be unable to find a suitable partner. With the sex ratio imbalance in favour of women, mothers-in-law—who play a key role arranging marriages—have become choosy. Everything else being equal, richer families with marriageable sons should be more appealing to the mothers of potential brides. One of the most visible symbols of this status competition comes through housing. Compared with consumer goods like cars, suits, and watches, houses are large, fixed in location, and their price is easily verified. A survey of Chinese mothers with young daughters by Shanghai Daily in March 2010 showed that 80% would object to their daughters marrying a non-homeowner. This places a lot of pressure on Chinese families with sons to demonstrate their value through homeownership. Since the turn of the century, increasing competition in the marriage market—triggered by a rise in the ratio of men to women in the pre-marital age cohort—can thus be a fundamental source of the increases in housing value.
To test this hypothesis, our study explored regional variations in Chinese sex ratios and linked them with regional variations in the size and price of houses. We found that home prices are higher and home sizes are bigger in cities with more skewed sex ratios. Strikingly, the sex ratio imbalance explained between half and one-third of the increase in housing prices in 25 major cities between 2003 and 2009. The results held even with the exclusion of major cities—Beijing, Shanghai, and Shenzhen—where foreign housing speculation has become common. Interestingly, there is no relationship between imbalanced sex ratios and rental prices.
The findings suggest that some of the increases in home size and home cost are socially inefficient; a lot of the money pouring into the housing market could be put to more productive use elsewhere. Men pursue larger and costlier homes and suppress their consumption of non-positional goods with the hope of improving their status in the marriage market. However, in the aggregate, sex ratios still rule—the number of men who cannot be married is unchanged. If every household cuts down demand for housing proportionally, all could consume more non-positional goods while the marriage market would not, at least, get any worse for single men.
Extravagant houses are observed not only in China, but also in many other parts of the world. These findings on houses as status goods in China may have implications for other countries.
References
Glaeser, E (2017), “The bubble dynamics of China’s housing boom”, VoxDev.org, 21 June.
Wei, S-J, X Zhang and Y Liu (2017), “Home ownership as Status Competition: Some Theory and Evidence”, Journal of Development Economics 127: 169–186.