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 anaemic.
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 neighbourhood, 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 centres. 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. New developments in the Central business district are rare. For developers, land is prohibitively expensive; so is demolishing older buildings and paying out occupants. As a result, to make the whole bill more palatable, the few new projects that did come to market only had tiny flats. For instance, units at Caine Hill, located just off the Mid-Levels escalator, are under 37 square metres but can cost over US$1 million (36.8 million baht).
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. Most land sales -- and future new developments -- are on the city outskirts, while secondary listings are largely in central areas. In addition, pre-owned homes are not so ancient: Only 17% are more than 20 years old, according to realtor Beike. The difference between brand-new and secondary apartments won't be that huge.
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 (Mr 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 realised.
As for me, I settled into a 30-year-old building in Mid-Levels where neighbours are mostly at retirement age. It's shockingly quiet. I'm betting that over time, Chinese will change their attitude, too. ©2024 Bloomberg
Shuli Ren is a Bloomberg Opinion columnist covering Asian markets. A former investment banker, she was a markets reporter for 'Barron's'. She is a CFA charterholder.