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Comment by mycroftiv | Hacker News Reader

I admit I know approximately nothing about how rapidly infrastructure deteriorates, detailed demographic trends in China, or the decision making process that allocates these resources. It still seems to me that there must be some rational justification for the excess construction, even if it is a misconceived idea. Someone in the system thinks the use of resources in building these cities has a purpose, and since the purpose does not seem to be immediate use, the idea of an investment or hedge is the explanation that makes sense to me. It's just an attempt to understand why these cities exist. Is there a simple explanation I don't know about?

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The "allocation of resources" is driven by builders, investors, and home buyers, not "planners". The housing flats were built because someone thought they could sell them.

The story I've heard is that builders are selling the flats mostly to small real estate investors who are hoping to flip them or rent them out without necessarily understanding the market or the prevailing rental vancancy rate (which in any sane rental market will never get above about 6% or 7%). Think of your aunt and uncle who buy a condo for rental income and as a retirement property.

None of this is a problem until lenders start handing out free money and foolish mortgages. Or perhaps investors are choosing the least-worst investment - real estate in a flooded market might still be seen as safer than any other options that small investors in China would have.

Most of those units you see have been sold and are being sat on by speculators expecting them to go up in value since real estate is still appreciating like mad. Sitting in front of the news here in Shanghai this morning it posted a message that in 67 out of 70 cities home prices went up in May. That's even after government curbs and more restrictions being put in place on who can buy property, especially in the cities.

Most educated folks I've talked with here acknowledge they're sitting in the middle of a property bubble. They assume that the large down payment options will protect the banks and just hope that they got in early enough to protect their initial investment.

The justification is economic growth. People are employed, new apparently valuable infrastructure is created, and GDP continues to grow. Why exactly China want's GDP to grow, I don't know, but maybe it hopes to get foreign investments that way.

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