Chimerica: Housing and Haircuts

I recently spent 3 days in the SF Bay area of California.  Great place to live!  My wife and I visited some friends in a San Francisco suburb call Millbrae.  Just your ordinary 2 bedroom ranch, with a kitchen out of the 1950s and no back yard.  You know, the kind that sells for $1,000,000 (even more to the south, in Burlingame or Palo Alto.)  And that’s after the bubble burst—prices are rising fast again.  It turns out the bubble-mongers were wrong–Bay area housing really is very valuable.  Later we were walking around San Francisco and I saw a sign in a barbershop window: “haircuts for $6.”  That’s strange; I thought San Francisco was an expensive city.

Then it hit me.  Houses and haircuts—the examples I always use for China.  Chinese houses seem ridiculously expensive, relative to Chinese incomes.  And haircuts are incredibly cheap, even in cities like Beijing (about $4.)  And guess what, our friends told us that the Millbrae school system is 50% Chinese.  And that $6 haircut?  Yup, right in Chinatown.  Then I recalled all those ultra-cheap meals in great Chinese restaurants in Boston.  Or those $15 Fung Wah bus rides from Boston to NYC.

The obvious schlock theory is that the Chinese bring their economy with them when they move to the US.  Stuff that’s cheap in China stays cheap in the US, and vice versa.  But I have bigger fish to fry.

People often tell me that the Chinese housing market is a giant “bubble,” because it’s somehow controlled or distorted by government policy.  The construction bubble is fed by easy credit, and the housing price bubble is caused by a lack of alternative outlets for those high-saving Chinese.  The Chinese stock market is full of lousy SOEs, and they can’t freely invest outside of China (although some money does leak out.)

But then what about Singapore, Hong Kong, Vancouver, Sydney, and Millbrae, where ethnic Chinese are free to buy alternative investments?  Why are those housing markets so expensive relative to incomes?

Some will read this post as a claim that the “Chinese housing bubble will never burst.”  That’s not right at all.  I’m claiming that there is no bubble, but what people think is a bubble will eventually appear to burst, but not really.  When that happens, the bubble-mongers will claim they were right all along, but they will have been wrong.  Just as they were wrong in 2007-09, when falling Millbrae house prices caused them to say; “I told you so.”  Yes, you told us so, and now in 2013 we know you were wrong.  Prices are back up to peak levels.

Here’s my prediction.  Any place in the world with large numbers of ethnic Chinese and sharp limits on new construction will see housing markets rise to seemingly “unaffordable” levels.  That’s “unaffordable” relative to incomes.

My dad was a real estate broker, and when I was young told me a story of going to the bank with a client who was seeking a large mortgage.  The banker asked the client a serious of questions about income in recent years, and the client kept reporting trivial numbers.  My dad kept smiling while the banker looked more and more frustrated.  Finally my dad said:

OK, now ask him about his stock holdings.

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