The answer is the latter, according to a study conducted by Prof Maggie Hu Rong, an assistant professor from the School of Hotel and Tourism Management and Department of Finance of the Chinese University of Hong Kong (CUHK) Business School and her collaborator Adrian Lee from the University of Technology Sydney.
The study indicates that Sydney’s newcomers are more likely to choose properties located in neighbourhoods that are more culturally similar to their own culture of origin. They are also willing to pay a price premium for properties in locations with shorter cultural distance.
And among those newcomers, people from East Asia, particularly Chinese, are most likely to choose to live in a community, which is closer to their culture of origin and more willing to pay higher prices for houses in such neighbourhoods.
“In our study, we find that an individual’s cultural background is indeed an important factor on housing prices,” says Prof Hu.
According to Prof Hu, globalisation promotes the integration of societies and has provided millions of people with new opportunities. As a result, megacities with culturally diverse residents, such as Sydney, London, Los Angeles and Toronto, are becoming the new norm, yet little is known about how the interaction between these people and their host country’s culture affects their personal and financial decisions, particularly in housing markets.
As such, their working paper “Melting Pot or Salad Bowl: Cultural Distance and Housing Investments” examined whether the cultural background of property investors and cultural differences of the neighbourhoods influence their housing buying decisions, in terms of location and price.
In the paper, the “melting pot” metaphor describes the fusion of various religious sects, nationalities, and ethnic groups into one distinct people, while “salad bowl” describes different ethnic groups, rather than assimilating, retain and coexist in their separate identities, just like the different ingredients in a salad.
“We would like to find out in a city with diverse culture, whether the ‘melting pot’ theory dominants or the ‘salad bowl’ analogy holds true. In other words, whether the different ingredients are all mixed together to make one dish or each ingredient also retains its own characteristics in the bowl,” she says.
For the purpose of the study, the researchers targeted Sydney, Australia’s largest and most culturally diverse city, where immigrants have made up a large component of its population. According to the statistics from 2011 Australian Bureau of Statistics Census, 57% of Sydney urban respondents are non-Australian or British origins.
The study looked at individual housing transaction data of the Sydney Metropolitan Area from 2006 to 2013 from Australian Property Monitors, one of the Australia’s leading national suppliers of online property price information to banks, financial markets, professional real estate agents and consumers. The dataset includes the transaction price, transaction date, property address, buyer and seller names, and relevant housing characteristics.
In addition, the researchers also utilised the data in 2006 and 2011 from the Australian Bureau of Statistics Census, namely the demographics of a suburb, to examine the ethnic composition in Sydney. The data shows that Sydney’s top five ethnicity groups in 2011 are Australian, Chinese, Irish, Italian and Arabic.
Then they introduced a term “culture distance” to gauge the cultural difference between a housing buyer’s culture of origin and the culture of neighbourhood of a property. They calculated the cultural distance by adopting the six-dimension culture framework introduced by Prof Geert Hofstede, which is widely used in social science research.
In this framework, a score on the scale of 0 to 100 is assigned to each country along six dimensions: uncertainty avoidance, individualism, power distance, masculinity, long-term orientation and indulgence.
For example, Australia and China differ significantly on several dimensions, particularly on individualism and long-term orientation (see image), according to Hofstede (2001).
Using a complex mathematical formula, the researchers reveal that the average cultural distance score over the entire sample is 1.99. Naturally, Australian investors have the lowest average cultural distance score of 1.35 across all ethnic groups. The average cultural distance score for Chinese homebuyers is 2.50. The higher the score on the cultural distance measure, the greater the cultural difference between a buyer and a neighbourhood.
So how does cultural distance between the homebuyers and the neighbourhood influence home buying decisions?
Cultural Distance Sensitivity
As expected, the study finds that cultural distance is an important determinant of property investors’ location choice and transaction price.
To be specific, housing buyers are more likely to choose properties located in neighbourhoods that are more culturally similar to their own culture of origin. And they are more willing to pay a higher price for properties in locations with shorter cultural distance.
In other words, there is a negative relationship between cultural distance and housing price. The greater the cultural distance between a homebuyer and a neighbourhood, the lower the housing price is in the transaction.
According to the study, if the cultural distance between a homebuyer and the suburb decreased by one unit, which is approximately the difference between the average Australian and average Chinese property buyers’ cultural distance in the sample, housing price rises by 1.1% or AUD$7,382.
Asians and Home Culture Preference
What’s more interesting, the study reveals that home investors from different ethnic groups display varying degrees of home culture preference.
“Investors from Asia display a greater degree of home culture preference, compared with European and Australian buyers. Particularly, Chinese are most likely to pay higher prices for houses in neighbourhoods which are closer to Chinese culture,” Prof Hu points out.
The study shows that if the cultural distance between an Asian property investor and the neighbourhood decreased by one unit, the housing price increase about 2-4%, whereas the effect is only about 1.3% for Europe housing investors.
Why is that the case? According to Prof Hu, people from Asian countries, such as China, India, Malaysia, Philippines and Vietnam, are more recent migrants into Australia, and thus have stronger cultural bonds with their countries of origin, and may display stronger home culture preference.
However, Europeans came to Australia relatively earlier compared with Asian immigrants and their cultural difference is relatively smaller, so they are better adapted to the local Australian society and their ties to their countries of origin are weaker.
“Cultural distance sensitivity or home culture preference is weaker for more established ethnic groups than recent migrants,” says Prof Hu.
It is worth noting that China has become one of the top sources of immigrants to Australia in recent years and there is a huge new wave of Chinese investment into the Australian property market. Their appetite for the country’s properties grows quickly.
According to New York Times, Chinese investment in Australian real estate has increased at least tenfold since 2010; Chinese investors have purchased up to half the new apartments in downtown Sydney.
As the study suggests homebuyers are willing to pay a premium for culture proximity, Prof Hu believes that it has important policy implications on social diversity and urban planning.
Recognition of foreign migrant’s inherent desire for cultural preservation is the first step towards a better understanding of foreign migrants and local communities, according to her.
“Awareness and respect for the housing investment preference of different ethnic groups would facilitate efficient urban planning,” she says.
“We document the natural occurrence of cultural and racial segregation through individuals’ housing investment decisions in Sydney. And we believe that a similar phenomenon could be observed in other migrant cities with diverse culture, such as San Francisco, Toronto or Vancouver,” Prof Hu concludes.
This article was first published in the China Business Knowledge (CBK) by CUHK Business School with contributions from Prof Maggie Hu Rong, School of Hotel and Tourism Management and Department of Finance, CUHK Business School. Visit bschool.cuhk.edu.hk