Britain’s lively capital, London: Arguably the world’s most international city, its cultural capital, the city with the second-highest private wealth after New York, home to four Unesco World Heritage Sites, more five-star hotels than any other city, and based on measurable and objective data, simply ‘the capital of the world’. It also has similar house prices to China’s tier-3 city of Xiamen.
Half the world away, straddling the beautiful Puget Sound and Lake Washington, is Seattle. Workers in the HQs of Amazon, Microsoft and other large tech firms have been blamed for driving city’s house prices to ‘dysfunctional’ levels, with real estate costing so much Microsoft has pledged $500 million to help alleviate the crisis. Seattle has similar house prices to China’s second-tier city of Hangzhou.
Whilst incomes are a factor in Chinese consumers’ spending behaviour, it would be amiss not to understand the impact house prices have on how wealthy Chinese consumers’ feel. As we’ve noted before, an estimated 90% of Chinese families are believed to own a home, 80% without a ‘mortgage’. Whereas share prices can soar and dive without impacting consumer sentiment, a rise or fall of house prices directly correlates to Chinese consumer behaviour.
Many economists in the west look to Chinese incomes as the key metric for comparing Chinese consumers with those in other markets, without factoring in the rise in wealth from soaring property appreciation over the past generation. Most of us have heard the stories about consumers “spending a month’s salary on an iPhone” or “three month’s salary on a handbag,” but the decision to spend is often less related to incomes than the consumer’s – or their parent’s – property wealth.
Beijing has the difficult balancing act of keeping house prices ‘affordable’ while continuing to have the consumption-driven economy ticking along by supporting house price growth. Facing the challenge of a slowing economy, the government has been pulling levers to keep house prices buoyant. Beijing is also allocating ¥30 billion ($4.2 billion) to make the move to the city from the countryside more attractive to help drive the economic growth they are seeking.
Economies in lower tier cities, and subsequent housing prices, have been beneficiaries of Beijing’s focus on driving growth in China’s lower tier cities and narrowing the gap between them and China’s big cities. This has seen categories from cars to FMCG grow much faster in smaller cities, often with less competitors scooping up the share. Yet an announcement two weeks ago to focus domestic economic activities in central cities and central clusters may see some of the fastest growth returning to cities in Beijing-Tianjin-Hebei region, the Yangtze Economic Belt and the Guangdong-Hong Kong-Macao Greater Bay Area.
These clusters aren’t to be sneezed at. For example, the Jiangsu province in the Yangtze Economic Belt now has a GDP similar to Australia, becoming the first province to have a GDP greater than ¥9 trillion ($1.26 trillion). Guangdong’s GDP will be even greater when it is announced this month. Similarly, China now has 17 cities with GDP higher than ¥1 trillion ($140 billion). These cities are markets comparable to countries in some cases and should be treated like that, rather than trying to use the same generic strategy across diverse consumers in these geographies. Messaging, channels and even product formats should be localised due to differing emotional and functional preferences and behaviour between cities.
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