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Comment by Animats | Hacker News Reader

It's not just internationally. China has done that to its own people. Or worse. Look at Evergrand and Sunac.

The government of China let developers sell un-built apartments to future residents. The residents not only paid down payments, but took on a mortgage obligation for an un-built building. "The majority of new properties in China — about 90% — are sold before being completed." - CNN. This produced a terrible incentive for developers to do huge numbers of housing starts and then not finish the building.

In most of the rest of the world, developers have to finance construction with their own money or a high-interest construction loan, then sell the completed building. This gives developers a strong incentive to finish the job. Building quality control is often a problem, but unfinished projects less so.

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There's something very powerful behind incentives level thinking, it really does push you into second and third order effects and meta level interactions to think "if this then what next". I've been wanting to step up my level of engaging and contemplating incentives in the generic.

Same here. If you find some literature about it that you're willing to share, would love to read and swap notes.

Read an introduction to economics textbooks. Use one from a popular MOOC syllabus. Cowen and Tabarrok is a great example.

Once you can turn everything into a model and an equilibrium the biggest systems of the world become much clearer.

Not in India, developers can sell before building but the money is in an escrow and released as the construction progresses. Also penalties and interest on any delays. I don't think selling unbuilt buildings is the bad thing, it's having no regulations or protections alongside that.

https://en.m.wikipedia.org/wiki/Real_Estate_(Regulation_and_...

China has

> the money is in an escrow and released as the construction progresses.

too.

The problem is it doesn't work: the fund release schedule can't be perfectly aligned with each stage of the constitution on a cost basis. There's a large amount of unfinished buildings (rather than not started at all) at a certain stage - it's the point when the_amount_of_fund_released - the_construction_cost_so_far is maxed.

I like the USA solution more - no mortgage for unfinished buildings. Developers can still sell it, but good luck.

"The majority of new properties in China — about 90% — are sold before being completed." - CNN"

Not sure if this is some kind of joke. Many countries have laws that permit selling appartments when they are about 80% complete. Some have lower, some higher percentages.

Just your average low-tier negative CNN propaganda, I guess.

i was gonna say - a lot of places you can put a bunch of cash down for an apartment that only exists as a picture on a sign somewhere.

In the UK you can buy "off plan", but you only pay a deposit, and that goes into escrow until you get the keys, the developer can't touch the money until then

I assume it's similar in most countries

Not quite. In india properties get loans during early construction as well, and the amounts are disbursed in tranches based on completion progress. Timelines must be filed publicly with RERA and a non RERA approved property is a red flag. No escrows as such for loans taken by buyer.

What I call loan is a similar arrangement to mortgage. Buyer pledges property as collateral, pays about 20% out of pocket, rest is a debt to be paid. Defaults result in loss of ownership of property. The agreements are tripartite. Builder gets paid from the loan taken out by buyer in tranches and builder reputation matters along with market value assessment and buyer's credit profile for obtaining a loan.

Other countries have the rule of law and you can sue a developer. That’s not possible in China. I did read where disgruntled Chinese are withholding payments on these unfinished buildings. Not sure what the repercussions could be for those who do it.

Lots of people lost a lot of money on never finished apartments in my (EU) country. Suing doesn't help you when there's no money left to distribute.

Most countries haven't made it the corner stone of their economy.

Often at a significant discount over waiting for construction to complete.

You mean like a deposit, right? Not a mortgage.

In the west (at least America) that money needs to be put in escrow.

Nothing you stated in your comment contradicts the statement from CNN that you are quoting. I'm guessing this is about CNN describing to its American readers what you take as a natural harmonious fact?

I am commenting because CNN portraits this as something negative when it comes to China.

When in fact, it's fairly normal situation almost anywhere in the world.

I am in EU, own an unfinished - actually not even started yet - apartment. Can confirm, absolutely normal.

have you paid for your non-existent apartment in full already?

Sinophobic pandering is hot all over. "Nothing to miss, here" is the intent, as if it would be crippling somehow for viewers to discover that not all of the world is developing.

CNN is addressing its American audience to a practice that is not familiar in the USA. Yes, CNN is USA-centric, because...it is an American news company with a primary user base in America.

That other countries mortgage unbuilt homes is more a "what about" rather than "facts needed for reader to understand."

"American news company with a primary user base in America."

And it's infamous for misrepresenting the other parts of the world to better suit USA's interests. Cases of outright lying and negative propaganda that they know is a lie abound.

What was the lie in this case?

There was no lie here, just a fact that wasn’t disputed. If you want to complain about CNN lying, find a lie in the article rather than a fact.

When you do it at the scale described, and make real estate market with large bubbles the corner stone of your economy, you get a unique situation than cannot just be explained away with "other countries do this too"

You can buy a house in the US from a developer before it is built. I think maybe the difference is that if something goes wrong you have a good chance of suing the developer. That may also be the case in China. I don't know.

You can sign a contract to buy a house from a developer before it is built. No bank will give you a mortgage before the house is built (even if they give you pre-approval), but of course you could pay in cash if you had that and wanted to (taking risk that the builder might go out of business and you will be SOL).

Since most people buy homes with mortgages, most homes in the USA aren't bought before they are built.

For US residential homes the bank has set milestones where they release funds. If the developer leaves the house half-built they only get half-paid (give or take). A similar thing applies to renovations.

Banks can and do refuse to pay until things are completed and city inspections pass the work. Could a city inspector collude with a bank and developer to rip off customers? Sure... but even if that happens it can only be small scale. The odds of the scheme collapsing increases exponentially with every additional city/bank/developer participating.

Politically China works differently. I'm sure there are plenty of developers doing good work. That clearly must be the case - not every building is a pile of garbage. But being a more centralized single-party state with state-owned banks the opportunities for shenanigans is obviously higher. It may also be driven by how much local budgets are influenced by new projects rather than ongoing property taxes. There is an incentive to approve projects and it is embarrassing to admit we should be tearing down the new building because everyone involved cut massive corners... that might also scare off new customers for the next project. Better to cover everything up and keep the scam going.

For that matter state owned banks from any country are well-known for perpetually extending loans rather than admitting the loan is garbage. This is not unique to China nor news to anyone.

But are they paying mortgages for something that doesn’t exist at all?

Are you talking about this article? (I don't see a link to CNN's article here)

https://www.cnn.com/2021/10/14/business/evergrande-china-pro...

The exact quote is:

"[Then] there is the problem of unfinished projects, even if there is demand. The majority of new properties in China — about 90% — are sold before being completed, meaning that any setbacks for home builders could directly impact buyers, according to economists."

What is the problem with the paragraph? It describes a practice that is common in China but may not be known to CNN's audience. It mentions a pitfall of the practice, which is true and has played out many times, in China and elsewhere, easily verifiable. Nowhere does it say that it's a China only problem.

In fact, read the whole article before playing the victim. Not long. You'd be hard pressed to say it's more negative that a US-related economy news piece.

Have you seen unfinished buildings of this scale anywhere else? These are just two examples from Guangzhou, one of the top cities in China.

https://www.youtube.com/watch?v=K368l0yNxvs

https://www.youtube.com/watch?v=vhv424HlkGM

It's China, you can't see anything they do in the scale they do it in anywhere else in the world. What's worse, not building enough or building too many?

> In most of the rest of the world, developers have to finance construction with their own money or a high-interest construction loan, then sell the completed building. This gives developers a strong incentive to finish the job.

I don't know how it works in other countries but in France for new apartments you almost always buy them before or during construction, which allow new residents to settle in right after the construction has finished instead of waiting for months for the sale.

The way we deal with the incentive alignment is simply by having a justice system that makes sure contracts are actually enforceable and mandatory insurance policy for developers should anything bad happen to their company.

this was banned recently (around 2020), also that sounds as legal as how stocks work in the first place during age of exploration and an intervention within seems maybe not strictly necessary.

> The government of China let developers sell un-built apartments to future residents.

This happens in India also.

> The residents not only paid down payments, but took on a mortgage obligation for an un-built building.

So what? They had a choice between paying more money for already built house now or paying less money but accepting the risks of developer's failure.

> This produced a terrible incentive for developers to do huge numbers of housing starts and then not finish the building.

Ugh, it's not like venture investing when developers are not liable for the failure of the company. The law usually (don't know exactly about China) skews the balance in favour of property buyers.

> In most of the rest of the world, developers have to finance construction with their own money or a high-interest construction loan, then sell the completed building.

And the cost of that high-interest construction loan is paid by the future residents. Not something you want when your goal is to give most of the population cheap housing.

> So what?

A very large number of Chinese citizens will lose their savings to these ponzi-esque construction schemes. Vast waves of defaults may take the banks with them. In Albania something similar caused mass civil unrest.

In case anyone wants a cite on the Albania bit:

https://en.wikipedia.org/wiki/1997_Albanian_civil_unrest

Ponzi/pyramid schemes captured two thirds of Albania's population.

Why don’t poor people just get more money? It would solve most of their problems.

> Why don’t poor people just get more money? It would solve most of their problems.

Well, every clever businessman will simply increase the prices in such a situation since more people can now afford to pay more. Problem solved *not*. Markets are self-calibrating.

The construction companies promised to build houses and funded the construction with sales of promises to build more houses. Now real estate is crashing, and the construction company is going bankrupt, and you’ve got home buyers who are underwater on a mortgage for a house that is not built. The construction company has billions in unearned revenue that it cannot afford to deliver on.

This is an absolute nightmare. Hundreds of billions of dollars in liability. And somehow getting the funding to complete these works will not improve their financial standing because they already took all the money for it.

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