Two types of people

There are two types of people in China: those who believe that China is suffering from a huge (residential) real estate bubble, and those who don’t.
The people who don’t have a couple of arguments, when you ask them why so many apartment buildings in China are empty. They say the houses are sold, but have to redecorated before people can start living in them. They argue that people buy a house for their children. They say that it is a long term investment, and yes, some of it is speculation – but not more then 20 to 30%.

Moreover, they will say that a bubble starts to appear when houses are not affordable anymore, mortgages are 80, 90, 100%  or even higher and supply is higher than demand.

Fair enough. That all sounds quite logical and reasonable. But then this. We reported earlier about the potential Chinese real estate bubble. And we also wrote about one of the most stunning examples of the extremities in the Chinese real estate market: the city of Ordos, Inner Mongolia. In this city the economy boomed in the recent years due to the mining industry; Ordos is nr. 4 in the ranking of cities in GDP / capita. Nr 1 and 2? Macau and Hong Kong.

In 2004, the government started the development of a new town, Kangbashi, outside of Ordos. The New York Times writes:

Kangbashi was projected to have 300,000 residents by now. And the government claims that 28,000 people live in the new area. But during a recent visit, a reporter driving around for hours with two real estate brokers saw only a handful of residents in the housing development.

As we mentioned earlier, we’ve been to Kangbashi two years ago:

Then it’s centre was empty. But it was also partly under construction, so it had a reason. But two years later, still no one is living there.How does this work? Are the apartments still not sold? Economist Ting Lu wrote a report about Ordos and found out:

In reality, however, all homes in the new town are sold out.  A couple of days before our visit, all units in a newly finished estate were sold within just one week.  Leverage is not high there, as … many home buyers simply pay cash … Owners in Kangbashi [Ordos' new town] are so cash-rich that they really don’t bother to rent their apartments.

Maybe it is because the climate of the city is quite unattractive: the area has 200 nights per year below zero temperature, minus 20 degrees is not an exeption and construction can only take place between April and October – otherwise it’s too cold.

But on the other side of the country, the same thing happens as well:

Analysts estimate there could be as many as a dozen other Chinese cities just like Ordos, with sprawling ghost town annexes. In the southern city of Kunming, for example, a nearly 40-square-mile area called Chenggong has raised alarms because of similarly deserted roads, high-rises and government offices.

That’s true. The southern part of Kuning is indeed suffering from a lack of people. We visited the area of Chenggong last January and saw this:

If you think this is it, and that it’s now first priority to fill these buildings, officials in Kunming have even bigger plans. As we mentioned a few weeks ago:

One of the major projects at the intersection of three of the (metro)lines will include a 456-metre-high skyscraper – “the city’s future landmark in the core business district”, He said.

Local officials in Ordos are also optimistic, according to NYT:

“This is a city of the future,” Li Hong, a government official, said during a recent tour of Kangbashi. “We are going to build this into a center of politics, culture and technology. That is our dream.”

Obviously, they are not part of the group of people that beleives in a bubble. Tsinghua Univerity professor Patrick Chovanec is, however. First of all, Chovanec writes:

what is happening in Ordos — unique circumstances not withstanding — reflects some of the most consistent and worrying trends in China’s real estate boom.

The explanation is the following: Chinese investors use real estate to stash their money. They cannot easily invest it overseas, the stock market is extremely volatile and the interest rate is lower then inflation, so it is no use to put your money in your bank account. Investing in real estate is a good alternative.

Chovanec describes the specific conditions that make this into a risky business:

It’s based on a highly unstable set of unique circumstances, including (1) limited investment alternatives for Chinese savers, (2) a limited track record, since China converted to private home ownership in the early 1990s, in which investors have never really seen a sustained downturn, and (3) minimal holding costs for idle property, including the absence of any annual property tax.

But then what about all these people – 300 million or so – that will move from the countryside to the city in the coming 25 years? Chovanec is clear about this argument:

In the meantime, demand for housing as a pure investment vehicle competes with demand for housing as a human need, driving up prices for people who actually want a place to live, and skewing the development market towards the very high end, which most Chinese can’t afford.  So despite the two trends that China’s real estate bulls often point to — urbanization and rising incomes — which are quite real, there’s still a major overhang in the market.  If you took all these empty stockpiled apartments, which are being held off the market, and had to fill them with end users, the market clearing price would be far below what people think these units are worth.  That’s a bubble.

So Chovanec is clearly in the first group. There is a golden rule: if shoe shiners taxi drivers start talking about the stock market, then it is time to sell. In China, everyone talks about investing in real estate. A sign? For ‘Jay’, a subtle commenter on Chovanecs blog, it is already chrystal clear:

To those people who argue there is no real estate bubble in China, I say they don’t even have common sense or they are insane.

Chinese netizens report: 51.23% of sold housing in Shanghai is vacant – Shanghaiist

Chinese netizens report: 51.23% of sold housing in Shanghai is vacant – Shanghaiist.

Der Spiegel forsees bursting Chinese Housing Bubble

Der Spiegel predicts a new challenge for the global economy in 2012, when Hu Jintao and Wen Jiabao step down from the government. The magazine predicts that will be the moment China’s real estate bubble is likely to burst. We’ve heard the argument many times before, but Spiegel focusses on the first ones most likely to suffer from dropping housingprices: local governments in China’s cities:

China, which long seemed immune to the global crunch, now faces the threat of a homemade real estate crisis. This could spell trouble for many local governments, which in some cases have financed almost a third of their major infrastructure projects, like airports and train stations, by selling agricultural land to real estate sharks.

The article quotes Cao Jinhai from the Chinese Academy of Social Sciences in Beijing, who scetches the worst case scenario, when local governments run out of money, because they lose their single most important source of income: land sales.

In the worst case, Cao predicts, there could be a large-scale run on the banks. “Of the 4 trillion yuan in the Chinese economic stimulus package, 3 trillion are in fact coming from local governments — and they borrowed the money from the banks.”

The Go West Project plans to focus on the overproduction of real estate in China during our trip to Yinchuan in October this year.

China’s Property: Bubble, Bubble, Toil and Trouble – TIME

The news and reports about China’s real estate market are not over yet. Time Magazine has an interesting article Bill  about this market, and it tries to answer if China is facing a(n exploding) real estate bubble. A believer in the fact that there is a real estate bubble is Andy Xie:

As economist Xie points out, residential prices in China relative to per capita income are far and away the highest in the world. The housing price-to-income ratio in urban China is over 20, which means it takes the average citizen’s total wages for 20 years to buy an average dwelling. (By comparison, the highest housing affordability ratio for a U.S. city — Honolulu — is 8.2.)

Nor, among home buyers in China, is there a significant amount of debt financing. According to Patrick Chovanec, a professor at Beijing’s Tsinghua University who studies the Chinese real estate sector, only about 50% of residential purchases are made using mortgages. The other half are paid for in full at the time of acquisition. (In the U.S., by contrast, over 90% of residential housing transactions are financed with mortgages.)

For most savers, that leaves real estate or the stock market — and if an apartment is the equivalent of a bar of gold, the stock market is the equivalent of a casino. Generally speaking, the Chinese love to gamble, but they love their bars of gold more.

China’s housing investment is preposterously large – Shanghaiist

Cary Hooper on Shanghaiist writes:

The more we hear about China’s housing market, the more outrageous it seems. China’s real estate investment grew by 75% last year: in total, 4.4 trillion yuan was spent last year, a large part of which was fueled by 9.5 trillion in new loans. If you need a physical gauge for just how much that is, chew on this: over the course of the year, China sold 937 million square meters of space, nearly twice as much as in 2008. In order to curb housing market mania, Wen Jiabao announced new curbs on lending to manage credit growth, but with the enormous contribution that housing makes to the national GDP, we’d be surprised if anything but a crash will stop people from buying new houses.

Also check the Shanghai Daily: property sales in China surge 75%