China: High GDP, 64 million empty apartments.
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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.
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.
Could you clarify your view on those two issues?
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.
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?
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.
Buyers can be reasonably sure that those new areas will be developed a few years later.
However, for some 3 years now, the state and central gov't constantly come up with new laws to avoid that people buy many apartments and leave them empty. The new property tax in selected cities is one example. An increase in required down payment capital is another (http://usa.chinadaily.com.cn/china/2011-07/07/content_128581...). In the city I am in, you only get a bank credit for your first apartment now, to buy further apartments, you have to finance them yourself.
Buying an apartment is the safest form of investment in a country where the health system is only just being built up, and the retirement system is not widely trusted (yet). It is more the thing of the new middle class. The really rich people will try to get part of their money out of the country as soon as they can. You never know how stable the country will be tomorrow, is usually the reasoning.
(I may move to Kunming later this year, the weather so much better there :)
Ping me if you're in town.
Now wait a sec. The bubble is illogical. That it involves individuals making rational choices in a distorted market doesn't exempt it at all.
In fact, it is a fine illustration of how distorted, artificial markets produce irrational results despite each person making choices that are logical for them.
People have no way of investing outside of Earth either, but that doesn't mean investment bubbles have to happen.
Instead of building things people don't need, in a natural market, things are made that people are willing to pay for with their own money.
The building boom in China has been directed by government. Banks were told to loan.
The government also created the housing boom in the US, through cheap money and loosening lending standards.
In both cases, the government created incentives to do stupid things. And the markets responded as markets do to incentives.
There's no doubt that the government (and neo-liberal mainstream economists) failed to prevent the bubbles.
But there's other factors at play. Housing takes a long time to reach an equilibrium. It can take decades for people to move out of a house that's too big for them. The market just doesn't respond quickly, which is a recipe for instability and chaos (just ask anyone who's studied control theory, or chaos theory).
There might be a few players who are smart enough to see this, but the average real estate investor isn't a Wall Street quant, or even a trader. They are a 20-or-30-something year old, with no financial nous at all. They see 10 years of solid growth (due to demographic changes, income growth, and government intervention), jump on the wagon, and that creates a little more impetus.
Do you really think that the government is entirely pro-cyclical? That they choke supply, and give out free money while prices are rising; and increase supply and curtail loans while prices are falling? I doubt it. And if the Chinese government is to blame, why is it so damn regional? The Shenzhen bubble is nothing like the Beijing one, which is nothing like the Shanghai one, which is nothing like the Inner Mongolia one. Some of that is local government actions, but I dont't think it is in most places.
You think empty cities crop up all on their own? With no rents being collected, you think people will just keep building and tying up their capital for no reason?
If you mean the US, the incentives are not trivial. Interest rates are a big one and they are kept artificially low. You can write off your interest. You don't have to pay capital gains taxes on the first $250k of profit on a house.
There are first time buyer programs too. And standards for lenders were greatly relaxed around 2000, with borrowers no longer required to put 20% down.
Fannie and Freddie also helped by accepting the risks of loaning to buyers with less than adequate credit. Lenders had no incentive to even check the claimed income of buyers.
So, not sure how all these things aren't that big. I guess housing prices just double on their own for no reason.
Which empty cities? The one in Inner Mongolia? That was the fault of the local government.
The one in Shenzhen, where the prices are really fucking high? There is no empty city in Shenzhen, because rich investors are buying up apartment at 10-40 times the median income. Crazy investors.
There's a huge demographic component to the bubble, too. There's a massive cohort of 20-30 year olds, and bugger-all 10-20 year olds. Because rich people have less children (and there's the One-Child thing, but even if there wasn't the numbers would be similar). Guess who is looking at buying a house? Guess what will happen to demand, in 10 years? That's what I'm talking about, when I say that demographics can have an effect.
Now, we come to interest rates and inflation. Artificially low interest rates in China, yes. They can buy gold, or invest, or buy houses; but due to the massive gains that houses have been showing (due to demographic effects, and income gains I think) they pile onto houses, causing a bubble. The government pushing construction projects MITIGATES this, though they could end up overshooting (yay, apartments for poor people).
During the Great Depression, the gold standard screwed things up, as the government had their hands tied and couldn't do QE. Did the government also cause the Great Depression, by sticking to the gold standard? No doubt, if you look to blame them for everything.
I don't know whether particular empty cities are caused by local or national government in China, or both. I was merely arguing that government was distorting things with incentives or coercion.
Cheap stupid credit's the cause? I agree. But in a free market, government does NOT regulate the cost of borrowing money. That's governed by supply and demand in a free market. The US is not a free market in this respect. Neither is China.
The gold standard was not the cause of the Great Depression; the collapse of the investment bubble created by the Federal Reserve, along with the interruption of international trade by the Smoot-Hawley Tariff Act caused the initial problem. Subsequent interference in the economy by both Hoover and FDR extended the problems.
The gold standard merely prevented the government from inflating away the dollar and using inflation to hide the consequences of other bad policies. Its a form of discipline that the founders wisely put in place to prevent the disastrous policies that many other governments have perpetrated throughout history.
But now the constraint of the gold standard is off and much larger bubbles can be created.
How they handle things from here is going to be interesting and a test of the government's ability to reign in corruption and clean up financial loses where needed...and about a thousand other things.
I would be very interested how much discussion China's policy makers have had on this question.
I don't think it is a given at all there has been a lot of discussion around this making it to highest levels - the consequences of the US housing bubble clearly weren't expected by US leaders despite the US having many, many intelligent policy makers (some proportion of whom could certainly see the crash coming).
The biggest fallacy I've heard recently about this housing situation is the oft' repeated "things are different in China" - you can't argue with basic maths like this. Surely the 2008 economic crisis was triggered by a similar situation, with western banks and investors ignoring fundamental economic equations?
Any quick google search will tell you about the hundreds of millions of government money being embezzled by officials outside of China, not to mention rich Chinese citizens legitimately taking American citizenship and investing their money overseas...
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 :).
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.
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.
Sanya is not an island, its a city on the island of Hainan.
Infrastructure in China is very good, especially train lines.
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.
Is the internet there fast/reliable (censorship isn't important because I can just use a US VPN)? How's the weather?
Is it difficult to wire money from America to developing countries like Cambodia?
For those cases where the people don't speak English, is it particularly difficult to learn the language when you're actually immersed in it on a daily basis?
What is the local social scene like? Is there a large expat community? If not, are the natives welcoming?
Hopefully it'd be possible to get some action. I don't mean to be crude, but that's sort of a requirement for me (and a lot of guys) to live in any place. It's obviously not an issue anywhere in America, but it certainly can be abroad. I have quite a few high school friends in the military, and those stationed in Japan and Korea have no problem getting local women, but Afghanistan and Iraq are a completely different story.
Transferring money is no problem (though the service I use to get a good rate - ozforex.com.au ask additional questions).
I've tried to learn Chinese and (a little bit of) Khmer. Khmer is much easier than Chinese, you'll pick up lots. But it's not essential.
It is VERY social, unlike any other place I've lived. Don't worry, the local girls will love you.
Is Chinese used there as well, or was that just a hobby? According to Wikipedia, it looks like Khmer, unlike most SE Asian nations, is not tonal. That'd make things a lot easier for a tone deaf person like me.
> It is VERY social, unlike any other place I've lived. Don't worry, the local girls will love you.
What about the political climate? Is it less oppressive than China, or about the same or worse?
Just hearing it all day every day won't make you suddenly magically start to understand it.
Of course, the difficulty level depends on the language. For example, many South-East Asian languages have tones and a highly bothersome writing system (especially compared to the 26 characters you're used to).
But no matter what foreign language you decide to learn, expect to make a huge effort.
Haha, I guess this can't really compare to a few years of high school Spanish (not that I really learned anything from that either).
Internet is reliable and fast enough (I use a 3G connection and this is very cheap). There are many telcos so lots of competition.
Weather is hot and at the moment wet. I love the weather.
btw: I don't think you'd ever get away with pretending to be located in America.
Yeah, US is $46k according to Google. Can you afford a chef, maid, and chauffeur? That would be absolutely awesome! (Sorry if I sound a little too giddy; I come from a lower middle class, rural background, and the thought of doing software development while living like a king in a faraway tropical paradise sounds absolutely magical.)
> btw: I don't think you'd ever get away with pretending to be located in America.
Why is this (honest question, I really don't know much about freelancing yet)? The time difference? For phone calls, I'd use Skype to get an American number I could give clients, and my parents would have no problems scanning & emailing any documents that might arrive in the snail mail.
And if you can build some relationships before leaving (I'll be doing it for a while before I graduate from college), would it then be possible?
If you are an American citizen, you have an obligation to pay income tax on your earnings. The same goes for many countries.
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!
There are now in Shanghai, Beijing and a few other major cities. That's quite new and started just this year.
not true. there most definitely are property taxes in india. the reason why folks park money in real-estate is that it seems to an appreciating asset not being subjected to harsh vagaries of the volatile stock market...
http://news.ycombinator.com/item?id=2746312
a more nuanced comment posted hours earlier.
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.
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.
Welfare fraud is not unique to the US.
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
Where's everyone at? I'm in Kunming, I know maxklein was in Shenzhen for a while.
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.
Its called "political reality".
But yeah, I read about the theory you linked to, about 10 years ago, when I studied it.
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.
The reason he could do this was because of the productivity gains incurred by assembly line techniques. Incidentally, the assembly line techniques also reduced the prices of automobiles to the point where an overpaid worker could afford them.
Possibly the most overlooked aspect of what Ford did is the standardization of the 40 hour work week so that his employees would have the free time necessary to make an automobile make sense.
This is mathematically impossible.
Suppose your workers purchase everything they own from a company store with an X% profit margin. If you pay your employees $Y, the actual cost to you is $Y(1-X). Increasing employee pay (holding all else constant) always increases your costs.