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China's housing glut casts pall over the economy (nikkei.com)
109 points by jseliger 33 days ago | hide | past | web | favorite | 79 comments



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.


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.


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.


I have noticed that chinese owned apartment buildings in other countries tend to stay empty for very long periods of time and renting at too high prices. Instead of lowering prices and getting some income, they frequently just sit empty and not serving the communities they're in.


That probably means the actual value of those condo units is $50,000, assuming the income holds up and the population keeps increasing. The big question to me is if the properties can even be maintained.


China is definitely a cautionary tale that just building extra housing, even absolutely absurd amounts of extra housing to the tune of tens of millions of extra unused units, isn't enough to address the affordability in housing crises.

The problem in China, like pretty much everywhere else, is treating housing as a "surefire" speculative investment that is always increasing in price.


Sure. You also need high enough property tax rates that it’s not attractive as a speculative investment.

But in China’s case, it seems like it’s a glut of money seeking a place to sit that doesn’t have other safe places to go. I’m guessing the values will crater, as the housing supply glut eventually does its job.


I mean, it sounds like there's a glut of unused housing kind of in the middle of nowhere, not in desirable cities like Beijing and Shanghai.

Building massive amounts of housing in the central valley wouldn't help the housing problem in the bay area.


But making the Central Valley as desirable as the Bay Area to live in would help the housing problem. Do this by building not only housing, but better infrastructure (roads, rail, schools) and create incentives for Bay Area businesses to relocate there (including the stick for those that don't).


Forcing companies to spread out doesn't make sense - they get value from being close together. The network effect is much more important than infrastructure.


Exactly. The Central valley is already cheaper than the bay area. The fact that tech companies aren't relocating out there tells you something.


Couldn't you live in the mountains? Where will we grow food? Already, the Bay Area development ruined some of the world's best farmland. There was no better place to grow apricots than San Jose, and now that is gone forever. Central Valley farmers feed the nation and beyond.


We'll grow food where it makes more sense. California has to pipe in water for those crops, and because migrant labor is getting hard to come by, the produce rots on the plant. The Colorado river is drying up south of the border because so much of it is being used. That farmland is gone. There is plenty of farmland that doesn't have to be in the state. The crops can be grown else where and shipped in like bananas. If there is enough demand. We always have bananas in season because they are grown around the world and shipped in. The US is also a net exporter of food, we grow plenty enough to feed ourselves either way.


What's the point in doing this? The bay area isn't dense at all, building up would be easy, and better for the environment to boot.


I can attest seeing the same thing on the same train ride 6 years ago. You could see the sun go thru the buildings, and i was obvious they were empty. I did the same ride 1 month ago, and I did see tons of big buildings, but this time they did not seem empty, might be a visibility thing tho.


Here is video from serpentza/cmilk (2016) https://www.youtube.com/watch?v=BcyYyyaPz84 talking a bit about it.

Basically this is investment, with money often coming from the whole family. No one really lives there. In majority of cases even finishing touches on properties would be unwelcome as it will lower resale value. They are being built everywhere (helps with GDP too). And plenty of developers are struggling with sales of new stock.


Yes I witnessed the same thing while visiting 2 years ago, riding the high speed rail from guangzhou to Guilin. Being from California, the experience of riding HSR and seeing too much housing seemed like the polar opposite of California. The documentary, The Chinese Mayor is an interesting watch on the topic: https://m.youtube.com/watch?v=u06a9Nb2GsU


Not that I disagree, but those could also be farmer or fisherman housing, or remote compounds (think remote military or university campuses). The ones around Beijing are usually inhabited in some form or another, even though they are in the middle of farmland or abutting mountains.

My wife has an aunt who lives in an apartment complex in the middle of nowhere near leiyang Hunan. This was because it was what the Energy SOE her aunt was working for required them to live.


How long can an apartment/building sit un/under utilized before it's value decreases significantly? Does the future of China's economy depend on the countries ability to help people earn a living that allows them to move into those apartments?


Maybe they're preparing for a huge influx of migrants driven from coastal cities by sea level rise.


Sea level rise is not a concern for the vast majority of countries for at least a century even in the most cynical climate change scenario.


Maybe. It could also be housing for the reincarnated souls when Christ returns.


Chinese aren't Christian.


I find this anti-religious bias (in the form of downvotes) distributing.


> 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.nytimes.com/2018/12/30/business/china-economy-pr...


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...


Could housing investment be to the Chinese what stock investing was to Americans in before the great depression?


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?


Because there was a demand from many people moving into the core cities and Chinese people value owning your own house as a status symbol and to marry (can't marry without a house). As well even up to now the previous homebuyer generation (people who should be 50 to 60 now) can still pay for the prices due to the sudden increase in normal people's wealth and deep savings.

However after a while many people caught on and it turned into speculation with people randomly buying housing and increasing the price sorely for property investing. As well the previous generation have more money and income and could pay, the current generation of homebuyers (25 to 35) are still either too young or not as wealthy as the previous which is hurting demand, moreover the excess speculation and the extreme prices for even the previous homebuyer generation have scared off many buyers.

As well, note that in reality only core city prices are insane such as Beijing, Shanghai, Chongqing, Guangzhou area. Places with not a lot of people, the property prices there are just around inflation prices.

Note that I speak from personal experience from Chinese property investing. As well China is so big that any generalization is flawed so note that too.


Speculation is also a problem in Wenzhou (no surprise there), Hangzhou, Kunming, Xi’an, Changsha, Chengdu, ... basically any big city has some property bubble going on at various stages of inflation or deflation.


it was so bad in Hainan they had to institute pretty strong quotas


Is it because of speculative investment?

Basically. Here's some helpful audiovisual material:

https://m.youtube.com/watch?v=BcyYyyaPz84

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


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.


> 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.


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


I took the high speed train from Shanghai to Huangshan this autumn, and saw this everywhere. Even in the middle of nowhere, you'd see sixteen towers under construction, being built simultaneously by sixteen cranes, as part of a development of dozens more. And this was very common to see.


That's ... outrageously nuts.


we are missing so much information, namely what is the build cost for that apartment. how much beyond construction is paid out to the local government. then comes, how much over sale has their been on the investment side, was the value appraised much higher than the expected sale was?

finally how many people are actually looking for residences?


The cost of the building is less than $250 per square meter. The cost of the land below, given the very high towers, cannot be much if you divide by 40-50 stories.


It should be about 32 stories max if they are using Chinese concrete construction techniques (most likely).


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.


Labor is generally 50% of the CONSTRUCTION cost. But financing and land are usually more than 50% of the total cost, especially in cities.

That means Labor is less than 25% of the cost. And labor isn't really THAT much cheaper in China than, say, Poland anymore.

Further, China has 1.6B people and 33% of it is mountains -- 69% highlands. It's not insane that land is more expensive than in, say, Serbia.

Finally, the world has never seen almost 600M people migrate to cities in 28 years time. Demand is unmatched in history.

That being said, China's average income per person is about 1/4th what it is in Germany, yet the average house costs nearly double -- with higher interest rates. AND, you only get a 99 year lease on the land you buy there, you can't own it. Taxes are different, sure, but it does seem like prices are quite high.


To add to this: contrary to popular belief, the type of housing built in China is not particularly cheap. Mid-to-high rises cost about 2-3x as much per square foot to construct as tract housing. So even if labor is 1/2 the price in China as in Germany, they type of housing stock might be 3 times as expensive to construct.

Sure, regulations might be more lax in China. But, the point is, the Chinese market is very different from Western markets.


The Chinese government sees housing construction as a jobs program for underemployed farmers. As a result, the workers are very unskilled compared to westerners, meaning they have to overbuild a bit more with concrete and rebar to get something that won’t fall over. Walls and floors are really thick compared to western contructions, and therefore deteriorate more quickly even with proper maintenance.

The main thing expensive about housing in China is the land. The labor is cheap (but inefficient), the concrete is cheap (if overused).


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.


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.


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


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.


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.


Not disputing that they are cheap, but most buildings will be dilapidated after 5 years if they are completely ignored.


Even buildings that are not ignored often look dipolated in China. The apartment I was last living in was a 2010ish, considered a nice place, but you could already see some concrete crumbling and of course, Beijing is a dingy place because of the sand and dirt.

I think most residential construction in China has a shelf life of around 30 years before they have to tear it down and do it again. This is because they favor labor intensive but skills light concrete techniques that require a bit of overbuilding. That way, they can keep uneducated migrant workers employed.


My understanding is that real estate is not taxed in China, so it is used to park extra money or as investment.

There are places in drug lord countries like Central and South America where e.g. condominium prices are $300,000 USD minimum, while people living there are lucky to earn $20-30 USD per day.


Funnily enough you say that as that's some extreme 3rd world example.

In London the average flat price is like $700,000 and a lot of people make $60-70 us per day here...


in china, the major part of house is land price. you have to buy house if you want your kids to go to school, especially in big cities, etc. it is a kind of living tax.

another factor, a lot people believe the housing price will not go down. so, people buy house to make money.


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.


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.


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.


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.


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


China should look to what Vancouver did for a tax on unoccupied housing - perhaps amplified as needed.

However, China is also a centrally controlled, single party state that is willing to experiment - if they haven't done it, it's likely because they don't want to.


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.


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.


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.


Currently, rents are affordable when compared to the purchase price of properties.

It's not likely consumer taste shifts; it's deeply embeded in Chinese culture that men need wealth (real estate primarily) and a dowry to a woman's family in order to propose marriage. Combined with far fewer women than men due to China's one child policy [1], it's created two classes of men: those who will continue to attempt to amass wealth to woo a mate, and those who have given up or have looked outside of China for a companion ("lost men"). The wrinkle is that more Chinese women are also opting out of marriage entirely, further increasing competitive forces.

It is hard to ignore cultural norms when you operate in a culture, and these norms are creating inelastic demand for housing. The prospect of being alone for the rest of your life is a powerful motivator.

[1] https://www.washingtonpost.com/graphics/2018/world/too-many-...


Maggie Shen King's book _An Excess Male_ is a really interesting speculative take on the long-term implications of this phenomenon. Strongly recommend, it's a good read.


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.


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


Yes. Under the 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.


In big cities (shanghai, beijing), some public services are tied to housing. e.g. public schools are only provided for local residents or people have houses in that area.


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.


True. The pipe dream would be that this weakens their authoritarian government, but a more conservative hope could be that it forces them to open up to foreign investment.


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.


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.


Even if you could, the rule of law is nearly absent in china. Your real estate investment could be destroyed by a CPC official relatively swiftly without recourse to you.


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.


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.


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.


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.


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.




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