Demand for Accommodation is Rigid, Home Buying is Not

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

February 2013

The roof over one's head can be rented

In recent years, many commentaries on the real estate market in China have attributed the rather sturdy, resilient, or even in some cases pressure-resistant residential house prices to “rigid” buying demand (剛性需求 or剛需 in short).

Your humble author has his doubts:

A) Do not mix up the human need for accommodation with the need to buy and own the home = your chance of physiological survival, let alone well-being, is very much diminished if you do not have a roof over your head for any prolonged period of time, unless you are marooned in some Pacific islands or something. However, whether you own or rent the place has very little impact, if any, on that aspect of survival.

But wouldn’t the home help the owner accumulate wealth and when he retires, he needs not worry about finding accommodation anymore? True and yours truly do think buying a home is a good choice for most families from both social and financial angles in the long run.

However, it still depends on individual circumstances, external and internal, and timing. Just ask the Hong Kong homeowners who had bought in the 1997 peak or for that matter the Americans who entered their markets in 2006.

In short, buying a home is NOT an optimal or even a good choice ALL the time in ALL places and for ALL people!

B) While the human need for accommodation tends to be rigid, buying the accommodation (home) is not = it is comparatively flexible, or elastic in economics terminology. For instance, when economy performance is up, people have $ in their pockets, they then want to buy stuff, homes included. Vice versa and they tend to not buy, and some existing owners may offload their homes, whether forced or willingly.

This is flexibility, not rigidity. Rigidity implies one MUST have it, regardless. Yes, some folks may behave like that yet most people are sensible about what they may afford.

C) Do not confuse a strong (human) urge to buy with rigidity to buy = when a real estate market is on the up cycle and prices are rising, people tend to ‘feel’ more confident (there is comfort in numbers) and as a result, there are more buyers, thus leading to higher transacted prices which in turn may entice others to join in the game, and in turn this fuels the cycle and prices higher. Indeed, it does ‘look like’ demand is rigid, the higher the prices the bigger the demand.

But this view is delusional. Not that the buying demand for home is rigid, but the human nature to pursue investment profit and capital gain, to keep up (appearance) with the Joneses, to fear being left behind in the game, or even to flaunt their wealth, is.

This phenomenon crosses cultural, national, and ethnic boundaries. Whenever the economics conditions and market opportunities present themselves, you can bet on it happening.  

D) IF demand to buy homes is really rigid = using the phenomena above, and when the market starts to turn downwards, home-buying demand should remain the same, no more and no less, and at the same prices too. Naturally, we have not observed such market behaviors.

E) Marriage and home buying = in some societies, these two activities are bundled together (you don’t get to marry my daughter, or son – to be politically correct, if you do not buy a home first) thus perhaps adding to the demand side. Yet the rigidity lies with the parents, and the peculiar culture to link the two activities together.

There is no scientific evidence that home-buying makes a marriage sounder, happier, longer, and so forth (Probably just the reverse; when there is money – from selling a home - to be split, divorce appears, at least, a sounder option).  

As such, touting the idea that there is rigid demand to buy homes has probably more to do with marketing, be these realty listings, developers’ projects, or even listed (real estate) company stocks.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.    

 Back to Home  /  Back to Simple to Read Stuff Section