Sex and the City Housing Market

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.