China's Housing Bubble

[Cheetah]

Broken off from the Chinese Economy -The Emerging of a Super power ?- thread.

Are you so sure its a "bubble?"

This is a rapidly developing/industrializing nation with a massive rural population.

That massive rural population can not afford the housing prices however. And thus, investors (from private people to large, government-owned corporations) simply sit on their houses until they can sell them for a profit. The prices are still going up, but few people are buying. As far as I can tell, that is a bubble...

Case in point: Kangbashi.

This newspaper article is in Norwegian, but anyway: http://www.dagbladet.no/2010/09/18/nyheter/kina/utenriks/13439618/. The pictures may speak for themselves.

Basically: Kangbashi is a completely new city one hours flight from Beijing. There is no pollution, the roads are wide and in good stand, taking the bus is free, there are lots of huge, modern public buildings including libraries, museums, swimming pools, huge malls, brand new schools and universities and conference centres. And there is virtually no crime.

The only problem? NOBODY LIVES THERE! The city has luxury apartments and single houses for 300 000 people, yet more than two years after construction only 20 000 people live there - 8 000 of the students at the completely new university! The rest is government employees and people hired to maintain the parks and public areas.

This, ladies and gentlemen, is a city in China:













And did you notice? They are STILL BUILDING!


So, healthy economy and all is well, or?

 

[wolfigor]

A housing bubble is not a sign of good economy (see USA pre-crisis): house are built continuously in the main towns of China, and property prices rise instead of decrease... the more banks and private investors buy properties, the more vulnerable the system will be to a financial shortage.

 

[Masada]

So, healthy economy and all is well, or?

To be fair, the city is rather small in the scheme of things. Furthermore, it being empty little to do with high prices and far more to do with people not wanting to be the first to move in. It makes sense, early movers are heavily penalised because of the lack of the services while in any case still needing to transit into the surrounding cities for jobs. You find the same thing in the West when it comes to new subdivisions. Some where I live have been close to empty for the last decade because the suburb is a fair clip from existing services. Its only now that a critical mass of people have begun to arrive that its become worthwhile living there. As to prices houses around it are apparently selling for comparable values.

 

[wolfigor]

Housing market in China is crazy... consider that there are about 60-80 millions new houses completely empty.
They don't get sold because prices are increasing (investment) and they are not rented because the money they can get from rent is a pittance compared to the house market price.

 

[Mise]

The problem you highlight in your OP isn't a housing bubble, it's the consequences of central planning. The same thing happened in the USSR, and also in the West when new housing developments were driven by government fiat rather than the profit motive of property developers. In China, government coffers are stuffed with cash, state-owned banks have been given orders from the capital to lend more to infrastructure and construction projects, and state-owned and state-subsidised construction companies are flush with cheap labour -- you're obviously going to get a lot of this kind of thing. China is full of this kind of thing -- it's just inevitable in that kind of booming command economy.

There isn't any demand for those particular properties in that particular city, but there is a blatantly obvious and chronic shortage of adequate housing in China.

 

[really]

I guess part of the boom is to relpace older less desirable housing stock and to house migrants arriving from the countryside bur are there seriously that many empty houses?

We have about 300,000 empty houses here ~ for a population of only 4.5 million.
A lot of them are in towns around Dublin that were built for commuters and will likley now be demolished.

Edit: The command economy stuff makes sense

 

[wolfigor]

The problem you highlight in your OP isn't a housing bubble, it's the consequences of central planning.

Housing development, like the one in the posted article, is not driven by central government planning but by private speculation.
People is investing everything into houses helped by very low (close to zero) interest rate and the economic possibility to wait for the right level of prices and buyers.

Chinese economy is very different from the west, you can't apply the same meter to measure the situation.

For example, the bubble will take longer to burst because, unlike in the west, buyers have to pay upfront 40% of property value to get any mortgage (in Europe usually you must have 20% of the capital).
Traditionally in China people have rather large saving accounts (again very different from the west) so even larger amount of money can be paid upfront when buying a property.

Strong family ties and one-child policy helps families to invest for their offspring (grandparents and parents can pool their saving together for the only child), so a much larger share of the population can get enough capital to access the overheated housing market.

The current attitude of mid/upper class in China helps the bubble too: they really think nothing can go wrong.

The Chinese government is now trying to cool down the market imposing higher interest rates for 2nd house and almost blocking the acquisition of more houses.
In this way they try to reduce the speculative move of big companies and bring prices slowly to a more normal level.

 

[innonimatu]

I guess part of the boom is to relpace older less desirable housing stock and to house migrants arriving from the countryside bur are there seriously that many empty houses?

We have about 300,000 empty houses here ~ for a population of only 4.5 million.
A lot of them are in towns around Dublin that were built for commuters and will likley now be demolished.

Edit: The command economy stuff makes sense

So Ireland has a command economy, does it?

 

[Monsterzuma]

I'm guessing the properties in the first four pics just don't sell because they are fugly. Another of the ails of central planning is that bureaucrats have no taste.

 

[ArneHD]

Reading the article, it says that the city was built by local mining companies.

Pengestrøm og byggeboom
I Kangbashi er det seks år siden lokalmyndighetene i byregionen Ordos vedtok å flytte det administrative hovedsetet til den støvete landsbyen med 1500 innbyggere.

Eiendomsutviklere og entreprenører så uante muligheter. Pengene strømmet inn fra myndighetene og lokale kull- og gruvefyrster, som så etter et sted å salte ned pengene sine. I 2008 hadde for eksempel Kangbashi nye veier for over 2,1 milliarder kroner.

Det eneste som ikke kunne kjøpes var nye innbyggere.

Moneyflow and building boom

Six years ago in Kangbashi the local government in the region of Ordos decided to move the adiministrative capital to the dusty village of 1500 people.

Property developers and entrepreneurs saw oppertunities. Money flowed in from the government and local coal and mining barons, looked for a place to invest their money. In 2008 Kangbashi had new roads buildt for over 2,1 billion Norwegian kroner (roughly 350 million dollars)

The only thing that could not be bought was new inhabitants.

Esssentially, the local government decided to locate some office buildings here, developers went berserk.

 

[Mise]

@wolfigor: Private developers don't plan entire cities, complete with universities, public services, malls, schools, etc etc etc... Private construction companies may have been employed to build them (alongside state-owned construction companies), but the developments are planned centrally. You're correct that this isn't the same as in the West -- in the West, private developers ask local governments for planning permission to build developments, in the hopes that they'd return a profit. In China, however, developments such as the one in the OP are planned by central and local governments, who then contract the work out, paying them with cheap loans from state-owned banks and from their own giant surpluses.

Similarly, state-owned banks are given targets from central and local governments for investing in various sectors. The Chinese government did this in spades during the downturn, in order to keep its economy going. Banks are told, "you have to lend X million Yuan to construction projects," so there's plenty of cheap cash floating around for developments like this. This wouldn't happen in a more liberal economy, where banks aren't told to lend (but merely given authority to lend).

House purchases, and the massive prices for housing in popular locations in big cities, are driven by private buyers, meaning that high prices in nice parts of big cities may indeed be characteristic of a property bubble. But housing projects such as the one in the OP are not -- they are planned and funded by central government. There is plenty of evidence that certain parts of China is in the midst of a property bubble, but the OP does not contain such evidence at all.

 

[Cheetah]

The problem you highlight in your OP isn't a housing bubble, it's the consequences of central planning. The same thing happened in the USSR, and also in the West when new housing developments were driven by government fiat rather than the profit motive of property developers. In China, government coffers are stuffed with cash, state-owned banks have been given orders from the capital to lend more to infrastructure and construction projects, and state-owned and state-subsidised construction companies are flush with cheap labour -- you're obviously going to get a lot of this kind of thing. China is full of this kind of thing -- it's just inevitable in that kind of booming command economy.

There isn't any demand for those particular properties in that particular city, but there is a blatantly obvious and chronic shortage of adequate housing in China.

I'm guessing the properties in the first four pics just don't sell because they are fugly. Another of the ails of central planning is that bureaucrats have no taste.

Guess I should have included this in the OP, but as wolfigor said, this isn't a product of central planning. The Norwegian article gives the background story: A provincial government decided to move the administrative centre to a small village of 1,500 people. Investors and speculators, both private persons and large mining corporations and the like, saw the move of the administrative centre as an opportunity to invest their money in a property market that was about to grow. I'm sure there were officials who planed where the roads should go and decided which zoning areas go where - like in all city developments, but most of the investments were done by private entities.

Private entities who still aren't getting a return on their investments, even years after the first areas were ready...

 

[really]

So Ireland has a command economy, does it?

We have or had:
A booming population, a booming economy, too low interest rates over too long a period, greedy people, greedy banks, greedy politicians, greedy developers, poor financial regulation, poor planning, a tax base too dependent on property transactions, an obsession over property, 100% mortgages, but to let mortgages, equity release mortgages.....

 

[ArneHD]

http://www.time.com/time/magazine/article/0,9171,1975336,00.html

Article from time about Kangbashi. In English this time. (No pun intended).

 

[Cheetah]

There is plenty of evidence that certain parts of China is in the midst of a property bubble, but the OP does not contain such evidence at all.

Oh, and please don't let my OP lock the focus of the discussion.

I wanted to discuss the reality or possibility of a Chinese housing bubble, and I thought the city development in the OP was a good way to start the discussion.

So let's broaden the debate: How bad is the possible housing bubble in China, and when will it collapse?

 

[Mise]

Guess I should have included this in the OP, but as wolfigor said, this isn't a product of central planning. The Norwegian article gives the background story: A provincial government decided to move the administrative centre to a small village of 1,500 people. Investors and speculators, both private persons and large mining corporations and the like, saw the move of the administrative centre as an opportunity to invest their money in a property market that was about to grow. I'm sure there were officials who planed where the roads should go and decided which zoning areas go where - like in all city developments, but most of the investments were done by private entities.

Private entities who still aren't getting a return on their investments, even years after the first areas were ready...

Reading the article, it says that the city was built by local mining companies.





Esssentially, the local government decided to locate some office buildings here, developers went berserk.

http://www.time.com/time/magazine/article/0,9171,1975336,00.html

Article from time about Kangbashi. In English this time. (No pun intended).

Well okay, there was some private money going into this, but both the Time article and the snippet ArneHD quoted say it was to some extent a government initiative.

Anyway back to the topic:

Personally, I think that, even if there is a property bubble in China (I can't make my mind up about it) I don't think that it would actually be a harmful one. Mostly for the reason wolfgir said: buyers in China usually pay in cash, and hardly borrow. They might lose "on paper", but no-one will have to sell their homes if house prices fall or if they lose their jobs, meaning that if/when the bubble bursts, there won't be the kind of catastrophic vicious circle that happened in the US or Ireland (and to a lesser degree in the UK).

 

[Cheetah]

Personally, I think that, even if there is a property bubble in China (I can't make my mind up about it) I don't think that it would actually be a[ I]harmful[/I] one. Mostly for the reason wolfgir said: buyers in China usually pay in cash, and hardly borrow. They might lose "on paper", but no-one will have to sell their homes if house prices fall or if they lose their jobs, meaning that if/when the bubble bursts, there won't be the kind of catastrophic vicious circle that happened in the US or Ireland (and to a lesser degree in the UK).

I know the Chinese people are good savers, so they should have borrowed less than similar people in the USA. However, we've also heard how Chinese banks have loaned out astronomical amounts of cash. Who took up those loans?

And even if nobody will have to sell their houses, it'll be very difficult for the Chinese government to keep a huge population content when their savings are wiped out.

That is, if there is a bubble, and it does collapse.

 

[Mise]

Well if the bubble bursts and the value of the property falls, it won't matter, because people won't know or care until they have to sell their house. Why do people sell their house? Well, if they lose their jobs and can't afford to pay the mortgage. (Or, more cynically, if the value of the property falls below the value of the loan, as happened in the US when people just walked away from their mortgage obligations.) But if they don't have mortgages (or have tiny mortgages), then even if they lose their jobs they won't have to sell the house. And if they don't have mortgages then obviously they won't do the 2nd thing either. Their savings won't be "wiped out", because they have a house now, not savings.

The people who will get burnt will be (a) the construction companies who used cheap loans to build houses, (b) the banks and investors who funded them, and (c) the government who owns, finances, implicitly or explicitly underwrites, or otherwise is on the hook for most of (a) and (b). But that's okay, because those people are flush with cash and can certainly afford it.

 

[wolfigor]

I know the Chinese people are good savers, so they should have borrowed less than similar people in the USA.

They have surely borrowed less in terms of % of the total property value (lets say about 50% of property value vs a 80-100% in the "west"), but Chinese have still subscribed to huge loans in terms of % of their income.
Banks, after the borrower could come up with at least 40% of property value, were quite flexible on the rules for borrowing.

And even if nobody will have to sell their houses, it'll be very difficult for the Chinese government to keep a huge population content when their savings are wiped out.

This is the main problem for the Chinese government: a bursting bubble will create huge discontent against state and party from that segment of the population that mostly supports them.

 

[Cutlass]

I think we had this discussion several months ago. And the conclusion was that because there was not a high percentage of loans outstanding backed by assets not worth the face value of the loans, that a collapse of any bubble does not result in a disaster for the financial system.