
China: High GDP, 64 million empty apartments. - zacharyvoase
http://www.youtube.com/watch?v=rPILhiTJv7E
======
trevelyan
Nicely done video, but I think it gets the story wrong. The bubble is not
illogical to start with. Thanks to currency controls most people have no way
to invest outside China. The Shanghai stock market meanwhile has huge problems
with adverse selection (bad companies pay to list -- successful companies list
in Hong Kong or the United States).

There are no property taxes in most of China, so people with money park it in
real estate. And developers keep building these assets because they're
insulated from loss in any case. If you're connected you can get zero/low cost
loans. And local governments are complicit because they make money "selling"
the land and don't have alternate income sources.

So no-one really cares if someone builds a massive complex and it doesn't
sell: the government and developers are covered by the bank, and the bank is
covered by the Central Government. This is just a distributional game in which
China pays for infrastructure by using public policy to inflate bank earnings
and then banks approve questionable local projects. And sometimes these things
make a lot of money, so it isn't as if they're taking a hit on every single
complex.

~~~
yaix
This is mostly what happens.

Additionally, these new apartment complexes are often build in "new areas" of
the bigger cities, to grow the city. China is trying hard to reach a level of
urbanization comparable to the west, so they need to "grow their cities"
somewhat aggressively.

I have lived in two of those newly build complexes myself. First there is not
much around, roads, maybe a supermarket and a few stores. The local gov't or
the developer offer the shop owners rent-free for a year or two to get them to
set up their stores in the new area, because there are almost no people yet.
But two or three years later, the apartments are mostly filled (either rented
or sold) and the shops are paying rent too, new supermarket have arrived, and
suddenly the area has become part of the city center.

Same goes for big roads. In the southern part of the town I live in, there is
a huge road grid (6 lane roads, etc) already build, but there is only
grassland. Come back in five to ten years, and it will be inner city area.
Smart to finish the roads before it is crowded.

~~~
j2d2j2d2
Everything you've said assumes these cities are going to explode with 1)
enough people to buy the apartments and 2) enough people who can afford them.

Could you clarify your view on those two issues?

~~~
jhancock
Why does the price on failed buildings have to stay high? Why couldn't the
government (through a bank, likely) reclaim a bankrupt project, restructure
its books and basically "give away" the units?

China certainly has its share of problems. Having lots of extra housing for
people to eventually move into is far from the top 10. Something related that
is a bigger deal is the energy of heating and cooling housing built without
21st century insulation.

I think its useful to _not_ compare how the U.S. and EU have handled bailing
out its financial institutions. China does not have to bail out its financial
institutions in the same way if and when it comes to that. They could simply
just let the rich take a haircut and give away a bunch of empty apartments to
cool the angry masses.

~~~
trevelyan
Hey Jon,

What is Shanghai like these days? In Beijing there is a ton of vacant
commercial real estate, but most of it seems to be owned by organizations with
no need to lease (else why not lower prices?). Where developments like SOHO
are competing is by selling rather than leasing smaller condo-style units. And
while the market for apartments has slowed down, there are still people
buying. Fifth ring road near Echo's place is 30,000 RMB per square meter.

I wonder more what the actual cost structure is for the complexes cited in
these videos. They should be the lowest of all since they're being built on
satellite territories. That said, even in a worst case scenario of total
default, I wouldn't expect banks to seize the property of people they've been
pressured to lend money to. And I wouldn't expect the property to remain
"unowned" if it seemed like that would happen. The developers would just sell
the assets to a property management company and go nominally bankrupt.

Agree about the differences between China, US and EU too, but my guess is that
banks are safe, and that as individual markets get overdeveloped local
governments will start adopting property taxes to raise revenue. This is NOT
going to be popular with people who've already taken out a 30-year mortgage to
buy a 60 square meter apartment, but that coupled with price stagnation should
curtail people's tendencies to treat real estate as assets for investment
instead of places to live, and push prices to whatever is logical given
demographic and migration trends. Soft landing?

~~~
jhancock
From the numbers I've seen, Shanghai is not far behind Beijing...lots of
available space in less desirable/developed areas, tight in others, pricing
that makes no sense for buying as a home. Certainly, there is nothing "fair"
about this.

What do I expect will happen? I expect a lot of people will eventually take
paper losses but get to keep the home they live in at adjusted terms. Larger
holdings will take losses relative to how connected they are, with a few
making out very well. Municipalities will test a variety of tax schemes.

How much social instability will there be in between now and this eventuality?
I can't say but can only hope level heads prevail.

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vorg
Can't view the video from here in China, but...

I've noticed lately developers/local govt tearing down buildings after
evicting tenants, then canning the new building project ("running out of
money", maybe), instead turning the land into a carpark. This creates more
demand for unsold apartments nearby, (as well as giving vehicles somewhere
other than footpaths to park on :).

~~~
wisty
Or the development was found unsafe (after a number have already fallen down),
or they realized that the permissions were not done correctly (or at all).

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whatwhatwhat
How many apartments are vacant in the US, just as a comparison, does anyone
know? That would make the number much more meaningful.

Also, are these apartments dirt cheap and do they speak english in these areas
at all? Maybe they could be a haven for startups, which are somewhat less
bound by geography, if they were extremely cheap. I might just be dreaming
though.

~~~
joss82
You may be dreaming, but you're not the only one.

What would be the hurdles to get a startup running in China? The Great
Firewall?

It's a big country so it's always possible to find a place that fits your
personal taste. For example Sanya is a tropical island. Not much
infrastructure there yet though.

~~~
wisty
Hurdles?

1) Language, especially when getting stuff like visas, work permits,
incorporation, etc. You can stay on non-work (or business) visas, but it's not
terribly legal.

As for the English standard, imagine you have a country with 1 point something
billion people, and speaking English was discouraged until about 20 years ago
(except if you were in intelligence). How do you teach it? Only young people
tend to be fluent. Most English teachers have never left the country, or had
much one-on-one interaction with people who can speak good English. Students
are great at certain elements of formal written grammar, if it's in an exam
setting. Vocabulary can be OK. But fluency can be a problem.

2) Red tape. It's non-existant for the old woman selling wonton soup by the
side of the street (as long as she can run faster than the local city
management, or can afford to give them lots of free soup), but not likely to
be fun for foreign businesses.

3) Talent. I'm sure it's there, but you won't know how to find it. You can't
tell if people are bright, unless you can communicated easily. Also,expect
programmers with great geometry, good algorithms, and no idea how to work in a
team; kinda like most countries, really.

4) Honesty. Chinese believe that "actions speak louder than words". If you
don't understand this, and you won't, you won't understand why _everyone_ is
telling white lies to you. People may explain this as "face" related, or "high
context communication", but to some people it looks very dishonest.

~~~
joss82
So, except for point 2, it's a matter of learning the language and culture
thoroughly.

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gopi
>> There are no property taxes in most of China, so people with money park it
in real estate.

Exactly the case in India. Most people there park money in real estate. Also
in the suburbs the official land value (determined by govt) is far less than
the real market value. So investing in that kind of land is way to park black
money (or corruption money).

The usual real estate factors like rent-to-own don't apply, Infact the prices
in the suburbs of even a 3rd tier small city like Coimbatore is more than that
in a major US metro!

~~~
yaix
>> There are no property taxes in most of China, so people with money park it
in real estate.

There are now in Shanghai, Beijing and a few other major cities. That's quite
new and started just this year.

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prostoalex
64 million empty apartments in a country with population of 1.3 billion is
sub-5%, hardly reason for panic, and typical of any rental market in the US.

~~~
tokenadult
64000000/1300000000 = 4.9 percent is only a correct estimate of the vacancy
rate if you assume that each apartment is to be occupied by only one person,
which is surely an untrue assumption about China and any other country I have
ever lived in. And see elsewhere in this thread

<http://news.ycombinator.com/item?id=2746312>

a more nuanced comment posted hours earlier.

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Game_Ender
An article in SF Chronicle provides some good perspective on these vacancy
rates in China to backup this video: [http://www.sfgate.com/cgi-
bin/article.cgi?f=/g/a/2011/07/07/...](http://www.sfgate.com/cgi-
bin/article.cgi?f=/g/a/2011/07/07/investopedia54293.DTL)

Even in the huge industrial cities of Shanghai and Beijing the vacancy rates
of approximately 50% and 35%. The peak for the US during the recession was
18.5% in Michigan.

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blumentopf
Nouriel Roubini on the investment bubble in China, including these ghost
towns:

<http://www.youtube.com/watch?v=_4yN00qGBbI#t=10m39s>

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blantonl
Could this type of economic activity by China be characterized as similar to
the "New Deal" that the US embarked upon in the 30's? Except in this case
China is attempting to stimulate their economy to "keep up" with western
society?

The sheer level of organization and determination to build all these assets
only to have them go uninhabited surely means that there are very conscious
decisions being made at very high levels.

I suppose capitalism keeps this kind of stuff from happening in the US, since
no one is going to put their own money on the line when no one is going to
buy. But the flip-side of that argument could be made in that Freddie and
Fanny (Government backed entities) were formed to entice the American public
to finance and build the American dream home. And we see what happened over
the past few years...

Those of you that are Economics or Econ/Poly Sci type folks... what is the
reasoning for this type of Government behavior? I'm curious as to _why_ China
would embark on such a quest.

------
martythemaniak
Give the empty apartments to poor folk. You solve the high income inequality
and property bubble at the same time ;)

~~~
wisty
Whenever that happens in China, the "poor" folk who actually get the free
apartments aren't always poor.

Welfare fraud is not unique to the US.

------
webXL
As long as these empty buildings don't fall down from neglect, and the money
couldn't have been spent more wisely (i.e. these will serve a valuable service
some time soon), then I don't see this as a big deal. But more than likely,
the glut of resources devoted to housing means neglect in some other place of
the economy.

 _The curious task of economics is to demonstrate to men how little they
really know about what they imagine they can design_ -F.A. Hayek, The Fatal
Conceit

------
jackityquack
They do have 1,000 million people and counting. 64million is only 6.4% That
isn't that high in reality. Give China a break. USA has a rental vacancy rate
of 9.7% and an owner vacancy rate of 2.6%. So combined vacancy rate of 12.3%.
So yeah, US's is higher. <http://www.census.gov/hhes/www/housing/hvs/hvs.html>

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joshwa
It's starting to sound like we need an HN China meetup...

Where's everyone at? I'm in Kunming, I know maxklein was in Shenzhen for a
while.

~~~
westiseast
Fuzhou! Garden city of the south! i would love a China HN meetup.
Organise/post it and I'll come.

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chopsueyar
The US has the empty housing, we just need the high GDP.

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zoowar
Ghost cities also keep construction workers employed.

~~~
yaix
Why is this downvoted? It is a valid point. Especially in 2008/09 they were
rebuilding every second road in the Chinese city I life in, even though the
roads where perfectly fine and had just been finished a few years earlier.
Same for apartment buildings. They can not just stop building them, because
there are literally tens of millions of people getting their income from
constructing those buildings.

~~~
whatwhatwhat
>They can not just stop building them, because there are literally tens of
millions of people getting their income from constructing those buildings.

Don't you see why this is obviously disastrous? There are so many analogies
that can be drawn -- that I'm not even going to try. If you don't see why this
is obviously ridiculous then read some stuff about the invisible hand of the
market (<http://en.wikipedia.org/wiki/Invisible_hand>). It is only a valid
point from the narrow perspective of the workers involved and the employers of
those workers selling their services.

~~~
yaix
Of course I "see" this. But I also see short to medium term considerations by
the CN gov't of political stability in the country. Especially at a time of
imminent power transition to the next political generation.

Its called "political reality".

But yeah, I read about the theory you linked to, about 10 years ago, when I
studied it.

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rorrr
This was posted a bunch of times

<http://news.ycombinator.com/item?id=2431869>

<http://news.ycombinator.com/item?id=2386584>

<http://news.ycombinator.com/item?id=2669432>

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ignifero
Same thing as Dubai: A sprawling ghost-megacity.

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nkassis
Would it not work if they did what Henry Ford was doing. Price them so the
workers can buy them? That way the money stays in your pockets while the
workers enjoy a better life? Win-Win.

~~~
iwwr
The problem is the expenses in building these things are capitalized (or
worse, booked at a greater value), so when they do sell at the much lower
value, the developers/banks/government will need to take a loss. So long as
the selling can be delayed, the losses can be hidden. If these were just
private entities, they'd take the losses and go on, but the government purse
is much larger.

~~~
fleitz
The losses aren't hidden, it's what one would call a long term investment.
Because the Chinese government isn't beholden to a two year election cycle
they're able to think over a much longer term horizon. Whether this is
good/bad in the long term remains to be seen, as a more dynamic business
environment might threaten their long term vision.

64 million surplus homes in China could be filled in a heartbeat. China is not
America where everyone for the most part already has a pretty decent home. The
current US estimates are similar per capita, but the issue is that US doesn't
have a massive supply of peasant farmers who would like much better houses in
the city.

China has started to reach the point where it is fueling the demand for it's
own goods similar to what happened to the US in the 20s and continued in the
50s and 60s as a generation moved from the farm to the city. In the US the
fuel was lend/lease and marshall aid, for China it's trinkets for Wal-Mart.

At 100,000 USD a pop the surplus represents 6.4 trillion dollars, if you
assume the units are overvalued similar to USD real estate meaning they have a
3.2 trillion dollar bubble. A 3.2 trillion dollar bubble is similar to the
costs of the US bubble plus a war in Iraq and Afganistan. The only difference
is the Chinese have peasants who will ostensibly drastically increase their
economic output and the fact that building modest housing probably has a
better ROI than war.

~~~
iwwr
For every year they sit empty, they depreciate physically and they also need
regular maintenance. Those are actual resources being used. And if the
buildings are in the wrong location altogether, it may be cheaper to just tear
them down than try to find a market for them.

~~~
robryan
Regular maintenance may be a lot lower ongoing cost in China than America,
maybe because of that it makes more sense to build ahead of demand.

