Monday, June 21, 2010

If Beijing and Shanghai Are Too Expensive for Young Men to Buy Homes then New Cities will Thrive --- Phoenix Revisited

The Song Remains the Same. The members of Led Zeppelin were wiser than we thought. Today, young men in Beijing and Shanghai are finding that they cannot afford to buy a tiny apartment . Their girlfriends are dumping them unless they can buy a car and an apartment. Is life fair? As the ratio of young men/young women goes to infinity in China this marriage market is growing tough. While I have argued before that a little bit of international migration could cure this imbalance, I'd like to discuss a different issue here.

My loyal readers are well aware of my January 2010 paper about China's cities. If you need another copy go here . In this paper, Zheng, Liu and I argue that migration across China's major cities is creating an open system of cities. Beijing and Shanghai are not the only big cities in China. If rents grow too high, both workers and firms will leave. Just as millions of people left the Northeast over the last 40 years to go to the Sun Belt, a similar trend will play out in China. Now, there is an interesting Chicken and egg issue here of who will move first but it is highly intuitive that jobs that do not feature large learning spillovers or deal making can leave Shanghai and Beijing and locate in cheaper land rent areas and workers will follow. Cities such as Houston and Phoenix have much lower home prices than Coastal U.S cities. In a similar spirit, workers in China can live in the "next tier" cities and have much lower home prices so their effective real wages will be higher and their romantic lives may improve.

So, I predict that a consequence of the runup in real estate prices in the China's Superstar cities will be a migration to the next tier cities.

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