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I once read a Citibank's report on China's real estate market that might give insights to the answer to that. The report is lengthy, as it addresses many questions, but the core argument for the craziness in China's real estate market is that it is the most common form of (long-term) investment in China, and the government is the biggest beneficiary of it.

Basically, if you look at an asset breakdown of personal wealth, real estate will account for 65% of all investments in China, while in other countries like the US or in the EU, that number is close to 20% (source: World Bank & Citibank's Investment Research and Analysis). Other than that, because of a reform on the tax sharing mechanism (in 1994), local governments are highly dependent on the real estate market, as 40-55% of their direct income comes from land sales and property-related taxes. That gives the government a very high incentive to keep property prices up and the real estate market booming.

I can email the report to anyone interested in it (sorry, can't just upload to the public here, I worked at Citibank once, could get me into trouble), just send an email to me (rafaelcamera@gmail.com) and remember to put HN on the subject.

> That gives the government a very high incentive to keep property prices up and the real estate market booming

Note, the central government doesn't want high prices, but the Chinese government is not entirely monolithic. "Heaven is high, and the Emperor is far away", is a common Chinese saying - people bend the rules when they can get away with it.

But yes, local governments get a lot of their revenue from land scales. If they are anything like Western local governments, they also get most of their bribes from developments (there are opportunities for zoning bribes, development approval bribes, building inspection bribes, waste disposal bribes, infrastructure connection bribes, and so on, depending on how corrupt they are).

I've just finished reading Boomerang by Michael Lewis and that huge concentration of assets in real estate sounds awfully like Ireland before the crash of 2008 - on a tiny scale compared to China, of course.

Do you think that is valid comparison? (NB In many ways I hope it isn't as a crash like Ireland's on the scale of China would presumably be disastrous).

One difference between the Irish and Chinese housing markets is that in Ireland the gains were from Irish selling to other Irish, in ever increasing sales prices and volume - flipping in it's purest form. In contrast, the Chinese appear to buy and hold their real estate as long-term investments.

You can also see that with their investments in Australian real estate (where I now live). A lot of the apartments now being built are investment properties for Chinese buyers. In a lot of cases, the building is nearly sold out even before construction begins!

"In a lot of cases, the building is nearly sold out even before construction begins!"

That sounds quite ominous - reminiscent of the property bubble here in the UK prior to 2008 (which was completely insane, but very tame compared to Ireland).

How is the rental market holding up there?

Rental markets are still strong for landlords. Too many people wanting a place to live, and not enough stock to fulfil the demands. The local governments are speeding up the permit process, but it's going to take a long time to catch up. Plus public transit isn't the greatest, especially in the high growth areas (Inner West and further out). The politicians are not looking long-term and thus screwing the people closest to Sydney out of an easier commute.

Luckily I don't work in the Sydney CBD, so my commute is pretty easy. :)

I wonder what effect the buildup of presumably unused, stagnant real estate inventory will have on markets like Australia's. I would imagine a pricing bubble, followed by a massive crash -- the extent of whose damages depends on the extent to which the real estate has been derived, repackaged, and traded with other financial institutions.

An oddly familiar pattern, and one that should give us pause.

(Sorry for the delay - I never think to check comments for replies.) In this case, the apartments do seem to be occupied. But Australia has had a housing bubble for some time IMHO. Government policies like negative gearing (tax write-offs for investors where rent doesn't cover the mortgage - who thinks of these things?!), 1st time buyers grants, stamp duty concessions, etc have kept prices from falling.

Sydney in particular has a very tight housing market due to lots of people moving in but not nearly enough apartments and houses being built. This has kept prices up, but there will have to be a drop at some point. The only question is when, not if, and how much.

A few points (with no overarching narrative):

- China's construction industry is a force unto itself - important economically and a huge employer. Its hard to say 'stop'.

- As it said in the OP - property seems the simplest way to invest money. After all, can prices go down when they are already so low compared to the west?

- In the west we built in the 1960s at (what seemed then) a ridiculous pace, with new building typologies that were often terribly designed. Like us, they will be living with (or in) the consequences for the next 50 years.

- Various levels of govt are already trying to put the brakes on the worse kinds of speculative development, with some success. Aside from the already clear examples of 'bad investment' (like the ones you point out) - the brakes are already coming from other directions too.

Why can't prices go down? As chinese apartment-owners start to look to 'cash in' their investment en masse, the supply/demand equation will flip and people will see at whatever prices they can to get some cash back out of their investment.

Unlike Chinese workers, a Chinese apartment is never going to compete against a western apartment

A city for one million residents is very small for China. Most of the time such a place would only be called a village. I lived in another ghost city in China for a few months. Suddenly, over night the city filled up and everyone was told they must work in a certain industry. Previously there was some other small industry (e.g. a shipping company with a few trucks with using the street as a warehouse and local services like a laundry mat). They were all kicked out because they were not the designated industry. The laundry mat re-opened a few weeks later on another street.

People forget that China is a command economy. The government tells you where to live and what to do. If you want to live somewhere else or do something else you need to apply for permission from the government.

Cities like Ordos shouldn't make anyone blink. Once the government knows what it wants to do it will be filled overnight.

Do you have any references for this anecdote? I'm very interested in this

I live in China. You can search about the hukou and business registration systems online.

Sorry, but you're just 100% wrong. You're describing some version of China from the 1960s, not today.

People in China are not told where to live, or what job to do. The government makes use of various macro-economic tools to steer the economy much more forcefully than in Europe perhaps, and perversely, the market forces (w/ Chinese characteristics!) are also fairly brutal and fast-changing, but people mostly choose their own professions and locations and in many respects, society behaves pretty similarly to the US/Europe.

> People in China are not told where to live, or what job to do.

Not directly, no, but the hukou system still exists, and the choice of living location is in some circumstances still heavily restricted.

The system is still the same. You still need government approval as a Chinese to live in another city. There are many free economic zones where you can almost do anything you want. But the underlining system is still the same.

I am in China right now. I lived in a ghost city just last year.

People should write books about that sort of thing. You know how everybody thinks their lives are completely normal and boring, but from the outside, they are filled with strange things? Nobody outside of China has any idea what it is like to live there. Any novel about daily Chinese live should be interesting.

In a similar vein, I remember how weird it sounded to me when an american friend told me in texas there are such big malls that people go there for working out (running) indoors.

There's actually a really interesting book called Mr China by Tim Clissold. It was based about 20 years ago but a real eye opener for what it was/is like to do business there

Well, China is power-centric culture rather than money-centric. This means you cannot assume market participants are all there to maximize their monetary gain, which is assumed by most economic theories.

For example, a large force behind the housing bubble is the drive to increase local GDP, which is a vital promotion metric for local officials; another force is local bank executives' desire to pretty-up their promotion metric by pushing for more "safe" yet profitable loans. Construction companies are mostly just there to ride the train.

> For example, a large force behind the housing bubble is the drive to increase local GDP, >which is a vital promotion metric for local officials;

Also top party men are rotated from region to region regularly, so they only care about the local economy for as long as they are in tenure, typically 5 years. Whatever happens after that isn't their problem.

The guys who built those empty cities and super-malls moved onwards and upwards. You can always blame the guy who took over after you for dropping the ball, or the guy you took over from for passing you a dud.

Simple: cargo cult economics. All modern western countries have big cities, masses of office space, and huge shopping malls.

A lot of money is going into building a new cubicle for everyone, but what's the economic rationale?[3]

Often, the economic rationale is simply the desire to create jobs (on the part of the government to stave on social unrest) and the desire to create profit (on the part of private enterprises that couldn't figure out how to be more innovative and so jumped on the bandwagon of the construction boom without seeing the risks).

As another comment notes, the government has realized this is a bad situation, and they're trying to put the breaks on it, but it's hard to do that and also enable a soft landing so that there's little or no social unrest. They're trying to shift from an infrastructure investment-driven economy to a consumption economy and an innovation economy, and the big debate is whether or not they have the right horses to be able to compete in that race.

"There are a lot of things I don't understand about China's economy, and every time I think I might have a handle on it, I come across juicy tidbits like these ones:"

Every tidbit you state is fully explained in the article's explanation of the lack of investment vehicles for middle and low income Chinese. When your bank account has a negative real interest rate, then real estate becomes a great vehicle for it, provided there is no crash. I suspect that the lack of non-government media in China causes many of the investors in these properties to have no idea that they sit dormant.

> The ghost city of Ordos

Did you know Ordos has higher GDP per captica than HongKong?

Only in certain environments does divide by zero == +Infinity.

Surely. Every single yuan spent on construction -- whether what is being built is useful or not -- gets added to GDP; so, if one takes all the spending in Ordos and divides it by its near-zero population, the number is surely impressive.

The same logic applies to the entire country's GDP, BTW: take out spending on construction, and China's GDP growth looks a lot less impressive.

Ordos has high GDP because it's extremely rich in natural resources.

http://en.wikipedia.org/wiki/Ordos_City#Economy

I think it's comparable to Dubai.

Oops, I meant to write, "if one takes all the spending in the ghost city of Ordos and divides it by its near-zero population, the number is surely impressive." The point I was trying to make wasn't about the overall Ordos area, just about its ghost city.

The old city has higher GDP per captica than HongKong. And the city looks like crap. That's why they've built a new one nearby.

This whole divide-by-zero rhetoric is a little silly. A quick google search yielded the following explanation:

http://en.wikipedia.org/wiki/Kangbashi_New_Area

Ordos City itself apparently has close to 2 million people, but there's a fully developed urban housing district designed for 300,000 which has only reached 10% occupancy since 2010.

"2.8 billion square metres of Class A office space" The grading inflation makes me sad. If you have 2.8 bn sq meters of above average quality office space, how much average and adequate quality office space do you have?

Just one really shitty cubicle.

It's a big one, though.

  > There are a lot of things I don't understand about 
  > China's economy

I found the videos which the following blog post is based on quite illuminating. Unfortunately, the videos seem to have been taken down.

http://asiavalueinvesting.blogspot.com/2011/09/chinese-banks...

I've read about those, it feels like their economy is base on building stuff.

They've also built one of the longest bridge that only save like 20 minute of traffic...

http://www.autoblog.com/2011/07/01/china-opens-26-mile-long-...

The article mentions how property is the best savings institution the Chinese have, so they build even if there isn't a buyer yet.