One of the big weakness of last week’s post, from the point of view of Mr. and Mrs. Li, is that at no point in their life journey was there ever the possibility of them buying an apartment in the city they were working in, no matter how small or cheap.

There was no chance of settling in as a new city residents. No chance of getting a residency pass (Hukou). No chance of being anything other than temporary residents.

This contrasts severely with the experience of every other generation in every other city in every other country in the world over the past two hundred years (new hyperbole alert), but it is beginning to be a cause of considerable angst in the workforce.

It has a big impact on businesses because it prevents workers creating ties to the place they work, and encourages them to constantly seek higher-paid unskilled work. There is no question of settling down and getting a certificate or a diploma in a useful skill. That is the normal path, over a couple of generations, to becoming middle-class, but in China the structure is preventing this kind of social mobility. (ironic outcome)

It has a detrimental effect, in the long-term, on business as well. It locks companies into a high-labor model, without any path to automation, quality and higher value-added products. Companies like this turn over staff rapidly. It’s in at 18, out at 20; with a million more nimble fingers coming up the pipeline every year. No incentive to train up.

The lack of affordable housing also encourages workers to seek out the big factory-cities that provide dormitories for the entire workforce, thereby restricting them further. These dormitories are infinitely preferable to living in a tenement but they are a trap for the employee and the employer. The good news is that, by the looks of things the companies that provides such environments are going to gradually move away from this model.

Professionals from smaller Chinese cities follow the same job-changing path because they rent in their new city of residence, and can move to the other side of that city at the drop of a hat. So the mobility is there for them. The downside is that it contributes to the average retention rate among professionals of 18 months.

Real-Estate Inflation

For Mr. and Mrs. Li the lack of housing was probably not such a big issue, as they never expected to own property, but it is definitely an issue for the generations coming up.

Average apartment prices in China are now so high that city residents cannot even afford them. They never really could. Looking at it from the outside of China’s housing market, it would appear that apartments are for well-off people to speculate on, not for ordinary people to live in.

The real estate transaction process is formulaic:

Stocks are over for a bit-buy apartment-leave empty for 1-3 years-sell at higher price-move cash to stock-wait a bit until everyone else joins in-sell stocks at higher price-repeat process.

Mortgage costs are often more than 100% of the average monthly income of both husband and wife in China, and currently China’s ratio of house prices to average yearly salary is among the highest in the world. What’s worse, this is for city residents, who earn 5-10 times the income of a production line worker from the countryside. Rentals are atrociously low, and encourage speculators to leave apartments and houses empty.

The likely short-term fall in housing prices will alleviate the problem for the low-paid workers somewhat but construction companies are biased in favor of high-end apartments that will sell for cash. They won’t step in to build low-cost housing the way companies might in other countries. Only the government can do this.

This kind of social housing investment is needed because Mr. and Mrs. are fast becoming the minority. The younger generation are not settling in for long-haul, temporary residence, and many expect to be able to buy an apartment eventually, and stay in the city where they work.

Value-Added & Salaries

China’s housing situation has created two particular problems for HR. One is that staff will suddenly look for big salary increases simply because they are getting married and want to buy a house.

But this has little to do with the value-added that they offer the company, and HR is charged with explaining this. People in this situation will reply by saying that they simply need the money, and will change jobs to get it. Up until now they have usually gotten it.

The second problem is that there is more benefit to be had flipping houses and apartment than in doing the actual work that you are employed for. China’s offices are filled with middle management who spend a considerable amount of their time on real-estate transactions, to the detriment of their work.

They only stop when they have enough cash reserves to resign.