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Sex and the City Housing Market

November 17, 2010

I’ve frequently commented that the Chinese government’s administrative measures, earlier this year, to “cool” its overheated property market had done nothing to change the fundamental dynamics driving so many Chinese to invest in real estate, and in particular, unproductive real estate.  The government, I said, could construct barriers (such as prohibiting second home purchases), but water would find a way to flow downhill.  I admit I had no idea, though, to just what lengths Chinese homebuyers would go.

The other day, I was talking with a part-time maid we had hired to help us settle in to our new apartment after relocating within Beijing.  She had told us, when we hired her, that she was divorced.  Now that she had gotten to know us, however, she informed me — matter of factly — that while she was, in fact, officially divorced, she still lived happily with her husband and daughter as a family.  Seeing the quizzical look on my face, she reassured me that the only reason they had gotten a divorce — a mere legal technicality — was so they could circumvent the one-home-per-family restriction and qualify to buy a second home in Beijing.

At first I figured her case must be an outlier, an exception.  It turns out the practice is far more common than I imagined.  I found an article in the South China Morning Post, published earlier this month, that describes what’s going on:

Welcome to the latest mainland trend: getting divorced, or appearing to, in order to save money on buying a second or third home.  With real estate prices still soaring and regulations enacted in April to increase the down payment needed on second and third homes while raising mortgage rates, couples have been taking advantage of one of the loopholes in the system.

Some couples merely buy fake divorce papers, without actually going through with it.  But actual, legal divorces in China are up nearly 10% this year, and nobody can say just how many are motivated by real estate fever.  But the motivations of those who are willing to at least contemplate such a drastic move are extremely telling:

An informal survey conducted by the Shanghai Financial News in May suggested that as many as 40 per cent of respondents would consider a tactical divorce if the savings were high enough. One reason is that although the regulations were put in place to curb property speculation, there is a sceptical view of the strategy’s effect.  “I think the reason couples choose to divorce in order to buy property is that they don’t expect housing prices to go down in the short term. They don’t believe the government measures will have an effect on housing prices,” [Professor] Cao said.

Apparently it didn’t take long for “water” to find its way downhill, either:  according to another article from China’s state-run Xinhua news agency, back in May, Chinese couples started exploiting this legal loophole almost immediately after the government’s “cooling measures” came into force.

“In the two weeks after the new rules were introduced, I received 16 clients hoping to get a favorable loan by getting a divorce,” said Li Yi, a lawyer with Tenghui Law Office in Chongqing Municipality.

One such client describes how it works:

“After we get divorced, my wife will claim our house, so that I can apply for a mortgage as a first-home buyer since I don’t have a house under my name. And we will remarry after that,” Li said, adding that he got the idea from a real estate agency.

Three observations I would make about this rather astonishing trend:

First, it makes my point about the ineffectiveness of administrative controls that fly in the face of market forces — people are just way too clever, they will find a way to do what they want to do.

Second, it’s one of those “shoeshine boys dispensing stock tips” anecdotes that surface around the peak of a bubble, when people will do anything — virtually anything — to pile into what they see as a “sure thing.”  Usually a bad sign.

Third, in my view, it sheds some helpful light on how average Chinese people tend to see the law — not as a set of rules governing fairness and defining legitimate rights and obligations, but as an arbitrary obstacle imposed from above which resourceful people will find a way to “beat” (and I make this observation with a great deal of affection for my Chinese in-laws, many of whom have precisely this outlook).  It’s an outlook that helps explain a lot that goes on in China today, from widespread video piracy to product safety scandals to WTO compliance frustrations.

11 Comments leave one →
  1. Anton permalink
    November 18, 2010 3:53 am

    She is a maid and has two apartments!?
    I think you are paying your maid to much…

    • prchovanec permalink*
      November 18, 2010 7:39 am

      Not nearly as unusual as you might think. The notion that “only the rich” own multiple apartments is simply untrue.

  2. Gan Lu permalink
    November 18, 2010 4:05 am

    At dinner the other night with a friend who owns a number of apartments throughout Beijing and makes a living in real estate. The subject of divorce as a way to get around the new laws was mentioned, whereupon my friend said something about a three-year post-divorce waiting period being in effect to prevent just the kind of desperate shenanigans you wrote of in your post. You might like to check if it’s true, this three-year waiting period. My friend knows his stuff.

  3. November 18, 2010 8:59 am

    how average Chinese people tend to see the law — not as a set of rules governing fairness and defining legitimate rights and obligations, but as an arbitrary obstacle imposed from above which resourceful people will find a way to “beat”

    Nicely put. I’d reckon you don’t even need the “affection for in-laws” disclaimer, as no Chinese I know would even take it as an insult that you put it this way: “what else could the law be?” The only amendment I’d suggest is that many don’t see law as an “arbitrary” obstacle but rather see each rule as designed to enrich some official, somewhere out there.

    • prchovanec permalink*
      November 18, 2010 10:04 am

      Well, I just wanted to make it clear I wasn’t dumping on the Chinese, just making an observation about how people tend to see things in their cultural context.

  4. November 18, 2010 10:12 am

    “how average Chinese people tend to see the law — not as a set of rules governing fairness and defining legitimate rights and obligations, but as an arbitrary obstacle imposed from above which resourceful people will find a way to “beat”

    Institutionalized and Standardized Cynicism. The flipside of that is every time I go to the subway station I see the same 2,3 girls sitting on the ground trying to sell trinkets (小贩)and I know I’ve been there when the cops were shooing them away and telling them its not allowed. Rather than suggest where they can go, etc, the game is for the girls to set up a system where they can see the cops coming and quickly scram (like children with their hand in the cookie jar). When the cops are gone, they return. Far be it for me to criticize the locals for trying to game the system: just look what the government has done (and covered up) in the last 40 years. To paraphrase Lord of the Flies, who will watch the watchers?

  5. Bob_in_MA permalink
    November 19, 2010 8:46 am

    Patrick,

    The fact a maid could afford this surprised me, too. Hearing stories about all the speculation, I had the impression it was the rich stockpiling apartments. because they had no place else to stick their money.

    Does her second apartment sit empty?

    On the respect for the law question, I can’t imagine anyone having any respect for a legal system they hadn’t the remotest possibility of influencing, which is principally enforced by local officials who are little more than petty tyrants.

  6. dannytchii permalink
    November 19, 2010 9:12 am

    To say Chinese respect no law is over-exaggerated,
    they are human too, have all the flaws defined as human’s,
    “Law and order” just like every learning process, takes
    time, Chinese is no exception.
    Considering its size, maybe it will take eon.

  7. Jay permalink
    November 19, 2010 9:37 pm

    Are Americans really that different? Naahh, you’ve heard so many stories about law makers don’t pay their taxes right “unintentionally” (or is it?), you’ve so many rich people avoiding paying taxes either through the swiss bank or just making the law they want.
    At the end of the day, Americans are just 50-steppers laughing at 100-steppers, human nature.
    At least Chinese are very hardworking. Americans? They want to eat the cake for free. They say they consume too much, but they decide to consume more, for free. Demand is weak, so printing more money to stimulate more demand, do you think demand is weak because demand should be weak and weaker? Talk about hypocrisy. I find it amusing when Americans think they represent truth.

  8. November 24, 2010 12:11 am

    My guess is there needs to be a whole turnover of generations. I can’t imagine anyone touched by the Cultural Revolution having any respect of law, justice, or authority in any shape or form. For those who suffered and the children of those who suffered as well, the world at any moment can be turned on its head. Not until this fear is diminished or obliterated with time and progress will the rule of law of any chance at all to take root.

  9. Kay permalink
    February 16, 2011 1:24 pm

    perhaps in China, getting a divorce does not entail a lot of the burden and heavy consequences it does in the US (with the mounting legal bill alone), and maybe it is not common largely due to social and cultural stigma, so perhaps legislators did not (or at least have not foreseen) to set in place measures that will dissuade people from divorcing? Because if it were so, then it would not be a very pragmatic way of going about it (financially speaking) if the whole purpose is just to buy property at lower rates and save some money.

    And the idea about Chinese people’s view of the law (“an arbitrary obstacle imposed from above which resourceful people will find a way to ‘beat'”), in one word: pragmatism🙂

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