
China's housing glut casts pall over the economy - jseliger
https://asia.nikkei.com/Spotlight/Cover-Story/China-s-housing-glut-casts-pall-over-the-economy
======
elamje
This is anecdotal, but I'm sure anyone who has traveled around China can
confirm: housing is not normal there. On one 5 hour high speed train ride
between Shanghai and Beijing, I saw no less than 2,000 apartment high rises
scattered throughout the countryside, most of which, clearly didn't have
tenants - no cars, no laundry hanging out windows, nothing. These are only the
apartments I could see from the train too! At some points there were hundreds
of identical, 20+ story apartments scattered all over the horizon with very
little activity around them. I hadn't seen anything like it in my life. The
strangest things I saw were 20+ story highrises just chilling in the middle of
crops - no roads leading to them, just standalone in a big field of some crop.

At the time I was weirded out, and upon further research it seemed like there
was and is something more systemic going on that we can't wrap our heads
around.

I know this is very anecdotal, but I was hoping to get some comments from
others that have travelled around China to see if they have noticed similar
things.

~~~
braunshedd
I spent ~2 years in mainland China (Zhengzhou, where iPhones are assembled).
The number of 15+ story apartment buildings along major freeways was
astounding -- all of them seemingly empty.

When in China I was told this is driven by a combination of two things:

1\. The average person in China does not believe in investing in intangible
assets. This means the stock market is not appealing, so they all pile into
the best physical investment around -- housing.

2\. Owning your home and a car before marriage is considered 'mandatory' in
traditional Chinese culture (for men). If you forego this you have what's
known as a 'naked wedding' \-- not good. Renting doesn't count.

Excess housing means the average rental yield (rent / property cost) is so low
that it's not worth finding tenants. Examples include $300k condos renting for
~200 USD / month.

~~~
bobthepanda
The Chinese stock market is not incredibly appealing given the constant
whiplash and regular confidence crises in listed companies. But it is
difficult, if not impossible, for your average Chinese person to invest
outside of the country.

Housing is used as an investment vehicle in the US, but the amount of capital
sloshing within China looking for a return makes the effect much worse over
there.

------
popupopu
> Sales volumes in 24 cities tracked by China Real Estate Index System fell by
> 44% in the first week of 2019 compared with a year earlier,

Ouch! That's definitely a housing crash happening. Looks like it will foment
angers amongst Chinese citizens, most of whom are avid real estate investors.
Maybe this is what overthrows the authoritarian Chinese government, who knows.

[https://www.scmp.com/news/china/society/article/2168025/publ...](https://www.scmp.com/news/china/society/article/2168025/public-
anger-china-spreading-property-prices-drop)

[https://www.nytimes.com/2018/12/30/business/china-economy-
pr...](https://www.nytimes.com/2018/12/30/business/china-economy-
property.html)

~~~
vinceiiikensin
Looks like it’s mainly due to unemployment rising: the supply of jobs in major
cities in western China, including Chongqing, fell by 77 per cent in the
fourth quarter of last year compared to the same period in 2017
[https://m.scmp.com/economy/china-
economy/article/2185176/cho...](https://m.scmp.com/economy/china-
economy/article/2185176/chongqing-battling-rising-unemployment-chinas-
traditional)

------
metalliqaz
This article starts with a confusing anecdote.

> Even in a so-called second-tier city like Jinan, a 100-sq.-meter apartment
> would cost him about 2 million yuan ($297,000). Yan, who makes roughly 6,000
> yuan a month working for a local environmental nonprofit organization, is
> only able to afford half of that, despite years of saving and generous
> support from his parents.

The article then goes on to talk about massive oversupply in the housing
market. At the end, it mentions a 20% drop in housing prices in some places,
but the article also mentions that cities responded to slowing housing markets
by removing a price _cap_ on units.

How is housing so expensive in the first place? Is it because of speculative
investment?

~~~
Tade0
_Is it because of speculative investment?_

Basically. Here's some helpful audiovisual material:

[https://m.youtube.com/watch?v=BcyYyyaPz84](https://m.youtube.com/watch?v=BcyYyyaPz84)

Around the 9:00 mark the get to the meat of the whole thing.

~~~
Balgair
Oh Holy Jesus...

That, what, 2km of street there? I paused the video, there's ~39 stories per
building (40 is unlikely, as the number 4 is considered unlucky), assuming 2
windows per condo, that's ~10 condos per floor, so ~400 condos per building.
From 8:15 to 10:13, there are 12 towers on the left side of the street. Later
at 13:00 they mention that this condo supply could house ~1M people! And it
hasn't been filled for nearly 5 years! Per other commentators, such condos are
~$200k each (Note: I've no idea on the actual prices here).

So assuming these numbers, there's ~$960,000,000 of simply empty condos, just
on the left side of that one street! Even if I'm high by a factor of 100
(totally possible), that's ~$10M per linear km of totally empty condos. The
rows of towers go about 3 deep. At about 11:15, you can see the that _entire_
horizon is filled with these empty towers (so claimed by the narrators). So,
that's what, roughly $1B to $10M per square km of totally empty condos, so
somewhere between $1000 and $10 per square _meter_ of empty real-estate?!

Look, I'm not an economist, but there is just something deeply, deeply
unsettling going on here.

Guys, Chinese real-estate can't not _implode. And badly_.

~~~
avinium
> Guys, Chinese real-estate can't not implode. And badly.

Having lived in China for almost 5 years (and working in property), I too held
this view. The whole system defies logic.

There is one key difference from the West - capital controls. If you literally
are not allowed to put your money elsewhere except for a bank of risky stock
market/financial products, why not put it into real estate? An apartment is
unlikely to disappear overnight into thin air (though it could certainly
collapse or catch fire).

Everyone ends up riding the same merry-go-round - in a closed economy, the
money has to go somewhere, so property ends becoming a marker or store of
value (I.e. a currency) rather than an asset in and of itself. At this point
in time, it’s on par with gold.

~~~
rando444
Except for instead of having something that has held value for thousands of
years, you have an unfinished concrete box.

------
AdrianB1
The prices of housing in China are mind blowing. As someone that built a house
in Europe with the exigent standards of regulations, the prices asked in China
are more than 10 times the cost. Given the lower income in the region, it does
not make any sens, the cost should be even lower because a big chunk is labor
cost. If the price of the house is 20 times the cost, why would anyone buy? In
what industry in the world is such return rate expected? Even drug lords don't
have it.

~~~
hilyen
Not to mention, a house built in china will last maximum about 5 years before
completely falling apart. They are built extremely poorly with poor materials.

There are entire “ghost cities” of empty housing only a few years after being
built, completely dilapidated.

~~~
mikestew
Your second sentence doesn't necessarily support the first paragraph. Houses
that aren't lived in, by my observation, rapidly deteriorate no matter the
build quality. Old widow dies, and house is tied up in estate arguing for a
few years: no one wants it now. Critters get in, it's all closed up with no
circulation, all that little shit that niggles at you as a homeowner each
weekend starts to add up after a while if you don't take care of it.

~~~
toomuchtodo
These are concrete structures, 20 stories tall, that are collapsing in less
than a decade. This isn't a case of lack of maintenance, but poor construction
trying to goose GDP.

[https://www.youtube.com/watch?v=XopSDJq6w8E](https://www.youtube.com/watch?v=XopSDJq6w8E)

~~~
mikestew
Thanks for the link, that clarifies the point enough to nullify my comment.
For those playing at home, there's some point-making stuff around 4:18.

~~~
mistermann
ADVChina is a really good channel., they've traveled extensively throughout
China, you can learn a lot from watching their videos that you'd likely never
encounter in mainstream news.

------
_bxg1
I have mixed feelings about this kind of news. On its own, it would be a good
thing for China's people and the world if the country's economy grew and fully
joined the other first-world economies. But their authoritarian government
should not be rewarded for its ideologies and policies, and certainly
shouldn't become a bigger global power in its present state. Hopefully the
current head eventually gets cut off and the body moves forward without it.

------
api
The housing glut simply means housing is overpriced, which is something that's
true to varying degrees in most cities globally. The fact that this is
happening even when there are so many empty units shows that this isn't a
simple supply and demand problem. The problem is that housing is being used as
a financial instrument, not a place to live.

~~~
pcwalton
Your comment might be relevant to e.g. Vancouver, but China has completely
different problems. In China, nobody is buying the houses _at all_. Not real
estate speculators, not people who intend to reside there. _Nobody._

It absolutely is a supply and demand problem.

~~~
metalliqaz
The article seems to dispute this claim. It says that nearly half of the
outstanding real estate debt is held on properties that are unoccupied.

~~~
pcwalton
I took that to mean properties that are held by the developer, where the
developer financed them with debt.

------
lewis500
Normally when markets have so much unsold inventory, prices fall to clear it
out. But prices can be "sticky" and won't go down. All this unsold inventory
makes you wonder why the prices are so sticky.

Here you can see one reason: "Shanghai homebuyers came out in droves to
protest a developer's decision to cut prices in an apartment complex."

I'm sure there are others. Like if you're holding a loan for a giant apartment
complex, and the owner cuts the price, it becomes immediately obvious that the
loan is not going to be paid back in full. But say it's a 30-year loan: if you
get the owner to keep the prices high and the units unsold a little long,
maybe you can unload the loan onto some other bank or investor before the
reckoning comes. Or maybe you're a bureaucrat who will be fired if the prices
go down.

I have also heard that in China it can be difficult for person to rent out a
vacant property. So people are holding onto empty units just as a store of
value, like bars of gold.

------
logfromblammo
The three most important things in Chinese real-estate, with help from Google
Translate:

1\. 地点 dìdiǎn (location)

2\. 位置 wèizhì (location)

3\. 现场 xiànchǎng (location)

The empty units are not where the people want to be (yet). I think maybe the
builders were counting on some people wanting a cheaper alternative (but not
too much cheaper!) to skyrocketing prices in the places where people already
are.

And China has decided it would rather let speculators buy up units and let
them remain vacant, than have them still owned by a near-bankrupt developer,
and either still vacant or facing pressures by existing residents to keep
prices high on the unsold units.

------
b_tterc_p
If housing prices are artificially high, but many homes are empty, rents must
be low, right?

So I would assume it follows that the danger to the Chinese real estate market
is consumer tastes shifting to just renting as is rational, which would
destroy a lot of these property companies.

That is, your value estimate changes from a high probability of selling for
huge profit to a high probability of renting for dirt cheap.

~~~
swuecho
you are right. rent is relatively cheap, but renter do not share same right as
home buyer. basically, the gov force you to buy house.

~~~
_bxg1
Can you elaborate? Are there literal legal rights that are only afforded to
people who own property?

~~~
secabeen
Yes. Under the Hukou System
([https://en.wikipedia.org/wiki/Hukou_system](https://en.wikipedia.org/wiki/Hukou_system)),
children could only attend schools in the area where your household was
registered. If had a rural Hukou, and moved to an urban area to get a job,
your children would not be able to attend school in that urban area. You had
to leave them behind in your rural area for them to attend school. There have
been reforms to the Hukou system in the last decade, so it's not as harsh as
it used to be, but it is still much better to have an urban Hukou than a rural
one.

------
sambroner
If China finds itself in a major real estate crisis, changes to lease length
and allowing foreign investment would immediately right bring back growth and
demand. Other consequences ignored.

Although the supply is artificial, there’s a huge supply of dumb money as
well.

~~~
sorenn111
I don't think with china's regulatory framework and government's ability to
rapidly change housing supply that foreign investment would use it as a store
of capital.

~~~
mikestew
Could I even buy a house in China? Without looking it up, I do know that
foreign real estate investment isn't as easy as it is in the U. S.

~~~
seanmcdirmid
Depends on the city. In Beijing, you have to be a resident for 5 years (paying
city taxes) before you are able to buy; a rule that enforced for both
foreigners and Chinese without Beijing hukou.

~~~
mikestew
Cool, thanks for the clarification. My source was my brother-in-law in
Beijing, who I was only half-listening to at the time, leaving me fuzzy on the
details.

------
agapon
To me it seems like China is going to be one of the fist countries where
workers will really feel the impact of "robotic revolution". And that will
impact (is impacting?) the purchasing power of the workers.

------
vondur
I thought most of the oversupply was in the “ghost cities” that were being
built to boost GDP. I’d imagine that in most of the large Chinese cities
housing would be pricy just due to the demand side of things. Huge amounts of
people have migrated to the cities in the last 20 years.

~~~
downrightmike
I think a lot of these projects are put together to make use of resources that
otherwise wouldn't have an output, and the recent trade "war" slowed the
export of these materials to the point where there isn't enough liquidity like
there was. There was an article a year or so ago that went over the crisis
facing cement plants that had to take out loans to cover interest on prior
loans and that most plants are operating at a loss, but still operating so as
to at least make some money. When the trade slowed last fall, they sold less,
and maybe that was enough to push them past the breaking point when interest
came due.

