China's housing glut casts pall over the economy
asia.nikkei.com
asia.nikkei.com
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.
The problem in China, like pretty much everywhere else, is treating housing as a "surefire" speculative investment that is always increasing in price.
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.
Building massive amounts of housing in the central valley wouldn't help the housing problem in the bay area.
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.
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.
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.
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.
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...
> 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?
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.
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.
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.
finally how many people are actually looking for residences?
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.
There are entire “ghost cities” of empty housing only a few years after being built, completely dilapidated.
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.
another factor, a lot people believe the housing price will not go down. so, people buy house to make money.
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.
Sure, regulations might be more lax in China. But, the point is, the Chinese market is very different from Western markets.
The main thing expensive about housing in China is the land. The labor is cheap (but inefficient), the concrete is cheap (if overused).
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.
In London the average flat price is like $700,000 and a lot of people make $60-70 us per day here...
It absolutely is a supply and demand problem.
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.
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.
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.
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.
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-...
Although the supply is artificial, there’s a huge supply of dumb money as well.