How increased wealth affects Chinese foreign buyers' housing consumption in Singapore

In 2005, the People’s Bank of China unpegged the RMB from the US dollar, transiting it to a floating exchange rate regime based on market supply and demand with reference to a basket of currencies. The policy shift resulted in an appreciation of the RMB relative to the US dollar and Singapore dollar. With stronger purchasing power, how did Chinese foreign buyers' housing consumption patterns in Singapore change? How has that affected Singapore's property market? Academics Fan Ying and Sing Tien Foo analyse data over the last two decades for the answer.
Singapore skyline taken from the Supertree Observatory at Gardens by the Bay showing the Costa Rhu Condominium. (SPH)
Singapore skyline taken from the Supertree Observatory at Gardens by the Bay showing the Costa Rhu Condominium. (SPH)

What happens when people become affluent? Do they consume more of the same or will their consumption patterns change? Will they continue eating hamburgers at fast food joints in greater quantities or will they perhaps contemplate prime steak at a fancy restaurant?

Economic theory suggests that consumption patterns will alter as people move across the spectrum from inferior and normal goods to indulge in discretionary and luxury items. German statistician Ernst Engel, known for the Engel curve and Engel’s law, found that as household income increases, the proportion spent on food and other subsistence necessities decreases, while that spent on education, health and recreation increases. 

Thorstein Veblen, an American economist and sociologist, coined the term “conspicuous consumption” to describe deliberate expenditure on luxury goods, primarily to signal wealth and status in a bid to gain one-upmanship over other members of the social circle. 

Wealth effect and conspicuous consumption of housing

In our paper "Macroeconomic Policy-Induced Wealth Effects on Chinese Foreign Housing Investments", we found that there was a conspicuous consumption of residential real estate in Singapore by Chinese foreign buyers who have experienced the wealth effect.

Headquarters of the People's Bank of China (PBOC) is pictured in Beijing, China, 28 September 2018. (Jason Lee/File Photo/Reuters)
The headquarters of the People's Bank of China (PBOC) is pictured in Beijing, China, 28 September 2018. (Jason Lee/File Photo/Reuters)

On 21 July 2005, the People’s Bank of China announced a major reform to the exchange rate regime by unpegging the Chinese yuan (or RMB) from the US dollar (USD), and then transiting to a floating exchange rate regime based on market supply and demand with reference to a basket of currencies.

The policy shift resulted in an appreciation of the RMB relative to the USD and Singapore dollar (SGD) as well. What that meant was that Chinese consumers — specifically Chinese foreign buyers of housing in Singapore — now had stronger purchasing power.

Would they buy more housing, or would they instead go for residences such as penthouses, high-floor units and large apartments that signal wealth and status (i.e. conspicuous consumption)?

Chinese foreign buyers were willing to pay more per square metre of floor area (as opposed to absolute sale value) than their counterparts for comparable housing types. 

Experimental design

The wealth effect arising from the policy shift affects only Chinese foreign buyers, whereas foreign buyers of other nationalities remained status quo. In this regard, the policy shift, in our experiment, is an independent variable that represents a “clean” exogenous shock that affects the housing consumption behaviour of Chinese foreign buyers. It adds evidence to a body of knowledge that previously had to contend with “endogeneity concerns” such as difficulty with isolating the effects of independent variables and factoring out “noise” from other unknown variables that may have confounded experimental results.

A view of the luxurious two-storey Nassim Hill penthouse, minutes away from the Orchard shopping belt in Singapore. (SPH)
A view of the luxurious two-storey Nassim Hill penthouse, minutes away from the Orchard shopping belt in Singapore. (SPH)

To isolate the effects of the policy shift on consumption behaviour, we had Chinese foreign buyers as the treatment group and other foreign buyers (Indonesians, Malaysians etc.) as the control group. We then applied the Differences-in-Differences (DID) methodology in multiple linear regression analyses to measure pre- and post-policy behaviours in both groups.

Findings

Our findings showed that Chinese foreign buyers had a greater propensity to pay more than their counterparts of other nationalities. Specifically, Chinese foreign buyers were willing to pay more per square metre of floor area (as opposed to absolute sale value) than their counterparts for comparable housing types. 

This willingness to pay a higher price per unit floor area is interpreted by the researchers as indicating conspicuous consumption (as opposed to following the Engel function, which would entail purchasing more housing). Prior to the policy shift, Chinese foreign buyers, on average, paid a marginal 0.63% more than other foreign buyers per unit area, but this differential jumped substantially to 3.42% post-policy shift.

...demand from the treatment group [Chinese foreign buyers] increased by 2.37% for high-floor units, 3.34% for larger units and 5.91% in the more expensive segment of housing markets.

The dining and living area in a show unit of an apartment at the completed Boulevard Vue condominium in Singapore. (Boulevard Vue)
The dining and living area in a show unit of an apartment at the completed Boulevard Vue condominium in Singapore. (Boulevard Vue)

To obtain more supporting evidence, we further examined the treatment group’s preference for “signalling” attributes, defined in the study as “high-floor unit”, “large unit” and “expensive unit”. While Chinese foreign buyers tended to be more conservative relative to other foreign buyers prior to the policy shift, their behaviour however changed after 2005 — demand from the treatment group increased by 2.37% for high-floor units, 3.34% for larger units and 5.91% in the more expensive segment of housing markets.

We next moved on to examine the extent to which the treatment group was willing to pay for the aforementioned signalling attributes. 

A comprehensive database, comprising nearly 19,000 transaction records by foreign buyers from 1995 to 2017, gave us ample leeway in investigating the purchasing behaviours of buyers with diverse profiles, and then to compare them against one another, for example:

1) Chinese vs non-Chinese;

2) Chinese, pre-policy shift vs post-policy shift;

3) Pre- and post-policy shift for both treatment and control groups;

4) Chinese buyers with preference for signalling attributes versus Chinese buyers looking for housing in general, etc.

...this group paid an 11.0% premium (per square metre of floor area) for high-floor units, 7.25% premium for larger units and 4.61% premium for expensive units compared to the control group of other foreign buyers. 

A view of two award-winning adjacent bungalows on Cove Grove in Sentosa Cove, Singapore. (Mercurio Design Lab)
A view of two award-winning adjacent bungalows on Cove Grove in Sentosa Cove, Singapore. (Mercurio Design Lab)

After drilling down to post-policy shift in Chinese foreign buyers’ preference for signalling attributes, results showed that this group paid an 11.0% premium (per square metre of floor area) for high-floor units, 7.25% premium for larger units and 4.61% premium for expensive units compared to the control group of other foreign buyers. 

Taken in totality, the post-policy shift of Chinese foreign buyers reflect:

1) A willingness to pay a higher price per unit floor area;

2) A greater demand for signalling attributes (high-floor, larger units, more expensive); and

3) A willingness to pay more for all three signalling attributes. 

These findings jointly make a case for the conspicuous consumption of residential real estate triggered by the 2005 policy shift.

The hypothesis is further corroborated when conspicuous consumption motives were augmented in high-income neighbourhoods and neighbourhoods with strong enclaves and social networks comprising residents from China. Additionally, signalling motives were more significant for Chinese foreign buyers who are owner-occupiers than for investors, who would presumably be more interested in returns-on-investment than status and prestige.

Competing explanations and theoretical implications

Through a series of robustness and falsification tests, the study ruled out the possibility that the treatment group’s willingness to pay was linked to other factors such as national bias or ethnicity affinity, local knowledge disadvantage or superstitious beliefs. The study also shows that conspicuous consumption motives were not triggered by immigration or the safe haven motives of Chinese foreign buyers. 

The Oliv by W Architects. This 23-unit condominiumin at Balmoral Road, Singapore, has green sky terraces that are angled in a non-linear configuration along its facade. (The Oliv)
The Oliv by W Architects. This 23-unit condominiumin at Balmoral Road, Singapore, has green sky terraces that are angled in a non-linear configuration along its facade. (The Oliv)

By ruling out competing explanations and therefore other independent variables that may affect housing consumption patterns, we make the case for a casual relation between the two phenomena under study. Considering that wealth effects were temporal prior to conspicuous consumption, and until new evidence to the contrary surfaces, we can accept the proposition that wealth effects cause the conspicuous consumption of housing.

Our study thus adds value to earlier research in this area that were inconclusive with respect to the magnitude and the causal direction of the housing wealth effects due to issues with endogeneity. 

At the broader level, our research is related to the transmission of wealth shocks to international housing markets and indirectly adds evidence to the literature on financial liberalisation and foreign capital flows.

This article first appeared in the newsletter “iREAL” of the Institute of Real Estate and Urban Studies, National University of Singapore as "Wealth effect and its implications on housing consumption".

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