update post on CPI^prop inflation
I repeated my rental yield reservations to Susan

Susan said HDB flat is not only a form of rental property investment, but also a family residence. Renovation “investment” is more like burn rate rather than investment. Mortgage interest is definitely burn rate.

wife has concern about “hard to sell” in 20Y. Similarly, Susan said decades ago, HDB price level was considered very high and many ordinary Singaporeans were worried about buying at the peak, but I guess they had no choice.

Jolt: This “inflation” renders rental yield decline basically inevitable whenever we upgrade or even downgrade. As I said in another blogpost, rental inflation is slower than prop inflation ….

By excluding housing, CPI is massively understated – MacroBusiness

—- Let’s put on the “red hat” and examine inflation due to …. real estate
See also inflation applies to rent not property price

Granted, if you have no family and live in a shared or tiny room, then rental will be a small cost. From 1993 to 2005 I paid around s$300/month, sometimes below $300 in Yishun (Agilent/Spherion). It didn’t rise a lot. Even if it does rise to $600, it is easily affordable to me.

(In contrast, Americans renters often spend a sizeable portion of income on rental.)

As shown above, Singapore experienced mild CPI inflation across the board. However, in relative terms my net worth shrank relative to my peers who owned private properties, because our perception of richer or inferior is dominated by FOMO (peer comparison), not inflation affecting livelihood.

This paradox is probably more obvious in Beijing or Shanghai. Your rental won’t go up much, so you don’t feel that much inflation, but relative to your ex-classmates who now own multiple properties, your net worth shrinks significantly over 10Y to 30Y.

Therefore, for both owners and tenants, property appreciation is clearly felt, even if rent inflation is slower and delayed.

Q: If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities? This answer is the OER (Owner’s Equivalent Rent), included in CPI survey of homeowners. See https://www.bloomberg.com/opinion/articles/2021-05-13/april-cpi-housing-may-be-inflation-s-hidden-danger

Spending to purchase and improve[3] houses and other housing units is investment and not consumption. Home price inflation is not consumption, therefore not part of CPI. However, for most middle-class Chinese families I know, home price inflation is one of the biggest inflations they _feel_ in their wallet, on a monthly basis…. paradox ! Well, whether it’s home inflation or food inflation, at the core, a high inflation (like 11% p.a.) means that our savings are losing purchasing power by 11% a year, as measured by a (realistic) fixed basket of things-to-purchase.

We can also remove “fixed” — high inflation means our basket shrinks 11% from last year, for the same dollars spent.

By conventional wisdom, property, stocks, gold are assets with enduring value, not consumed. But imagine you need to buy silver jewelry every year, perhaps as gifts to many kids in the extended family, as a local tradition. Silver price inflation would hit your basket and contribute to everyday inflation.

[3] Consider property renovation. Suppose you own several commercial/residential properties so every year something would need upgrading. Renovation inflation would hit your basket and contribute to a clearly felt inflation. Renovation is investment… Paradox!

Therefore, in reality we don’t need to hang on to the investment^consumption theoretical dichotomy.

Now consider the middle-class Chinese families. Many [2] of them carry a heavy mortgage. Once the mortgage is halved, (family) free cash grows, and they would want to buy a better home, esp. in the Singapore context[3]. Not every year, but perhaps every decade. The home price inflation hits their basket real hard, because .. hold your breadth… because higher down-payment and higher monthly commitment dry up their free cash flow. As a result, the family has far less free cash to spend on vacations, dining, enrichment and other /discretionary/ spends. Their living standard suffers due to that expensive home. In Tier 1 Chinese cities, one expensive home could dry up the cashflow of 3 generations.

[3] The new home often offers about the same rental income and resale value as the old home. That translates to lower investment returns. I told my wife that

“If we spend additional $300k on a more comfortable home but consequently earn an inferior investment return, then we kiss goodbye to our carefree easy life, and cashflow high ground.”

Q: [2] Is this common behavior? Does it affect majority of the middle-class Chinese families? I would say yes.

Q: why do these families allocate such /disproportionate/ amount of (ultimately limited) resources to such luxury homes?
A: I can see it in my wife. The desire for better home seems insatiable.

In the U.S. we will experience the same “upgrading” process. Perhaps in most U.S. locations appreciation is not much more than CPI inflation.

— Paradox: Property price rises and falls more like stocks and gold, while rent and most CPI items experience slow and one-way movement i.e. inflation?

• property, stocks, gold can be sold by individuals, so price fluctuation is higher than “supplied” goods and services.
• Property, gold, stocks are driven by investor sentiment such as greed (hot money) and fear.

Q: When valuation drops 9% in a year, why does rent stay basically unchanged?
A: I feel most owners would rather leave the unit vacant than reducing the monthly rate. I am more “flexible” than them.

— home ownership is not a necessity, more like an investment, though the middle-class Chinese don’t feel that way.

Everyone needs housing as a basic need just as food, transport, entertainment, but not everyone needs to BUY a house, esp. in a volatile property market. Note a volatile market is usually too risky for consumers, and possibly more suitable for long-term investors.

In Beijing, the residential rental market is underutilized and only acceptable to the migrant workers. Most long-term residents prefer to buy, despite the volatile and extremely overpriced market.

Fundamentally, the middle-class Chinese sacrifices current spending in order to save/invest for the future, including future generations. Singapore government’s Past Reserve is the most institutionalized example. At the individual level, the most visible and significant save/invest item is home-purchase.

I think many consumers in western society spend more than the stereotypical middle-class Chinese, even at the same income. One of the biggest reasons is renting vs buying.  Suppose the westerner (renter) and the Chinese (buyer) live in two neighboring identical homes . I bet the renter’s housing outlay is much lower than the buyer’s, on a monthly basis.  If (a big if) both families have the same household outlay of $5000/M, then a bigger portion of that outlay goes towards housing for the Chinese than the renter. As a consequence, the Chinese family have less to spend on other things. Home price inflation shrinks their basket.