Are the Chinese obsessed with luxury?

China's real estate marketThe question is when the bubble will burst

Real estate agent Zhu Yu is in his shop in Shanghai's downtown Jing’an district. He points to the 20 or so printed apartment advertisements that are hanging in his shop window.

"The average price for one square meter in this part of the city is around 12,000 euros. This applies to living space that has already been used and old buildings. New buildings cost around 19,500 euros."

One hundred square meters for two million euros

A new one hundred square meter apartment in the center of Shanghai costs an average of around 2 million euros. In terms of quality, such a new building is far from meeting the standards that one would expect in Berlin, Hamburg or Cologne.

"My apartment cost around one million euros," says Lü Kang, who is in the mid-30s. "I paid around 30 percent, including taxes and fees, I paid a little more than 300,000 euros."

Buying property to compensate for inflation

Lü Kang works in the management of a French luxury goods brand and lives with his wife and child in Shanghai in the apartment he bought last year. The money for the down payment at the time came largely from the profit he and his wife made on the sale of two smaller apartments that both had previously owned. A story typical of China, says Oliver Rui, professor at the China-Europe-International-Business-School in Shanghai.

"Over the past ten years, real estate prices in Shanghai have increased tenfold. The Chinese believe that real estate prices can only rise. They would put their savings in real estate at any time rather than in a savings account. Because that way they can offset inflation."

Investment and speculation

The main difference between the real estate market in Germany and China is: In Germany, buyers want to realize their dream of owning their own four walls. In China, it's all about investing and speculating.

"From the point of view of an economist, I can say: We have a real bubble in China. All three criteria are present: First, the relationship between and property price and income is high. Second, the relationship between purchase price and rental price is high. And third, there is there is a lot of vacancy. "

State fueled run on real estate

Many new buildings are chronically vacant, especially in medium-sized and smaller Chinese cities. In large metropolitan areas such as Shanghai, Beijing and Shenzhen, on the other hand, housing is scarce despite the high prices. The following applies to all of China: The state is fueling the run on real estate, according to economics professor Oliver Rui:

"Many provincial governments get half of their income from selling land. They need a lot of money for all the infrastructure projects. They don't have that money. Where do they get it from? They sell land."

Price level will remain high

Even Rui does not want to speculate when the Chinese bubble will burst. But it will remain more expensive than in Germany.

"It is deeply rooted in the consciousness of the Chinese that a family is defined by owning a home. This mentality helps to keep the price level high."

The Shanghai family man Lü Kang confirms that:

"In the minds of most Chinese, success is measured by the question: Do you own an apartment in the city you live in. That means: You can stay there, look for a serious job and start a family. Buy an apartment is inevitable. "