Housing prices in some cities in China have increased by 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 policy makers, academics, and ordinary people. 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 is for second homes is as high as 70 percent 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. A recent article, “Home Ownership as Status Competition: Some Theory and Evidence” (which I co-authored with Shang-jin Wei and Yin Liu), published in the Journal of Development Economics, offers a new explanation to this puzzle. The rapid rise of home prices in China can most readily be explained by the drive to attract a prospective sexual partner.
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 favor 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 percent 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. Increasing competition in the marriage market since the turn of this century, triggered by a rise in the ratio of men to women in the pre-marital age cohort, can be a fundamental source of the increases in housing value.
To test this hypothesis, the study explored regional variations in Chinese sex ratios and linked them with regional variations in the size and price of houses. It 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 finding suggests 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 not altered. If every household cut 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.
Xiaobo Zhang is a Senior Research Fellow in IFPRI’s Development Strategy and Governance Division.
