China’s ubiquitous ghost cities

Cross-posted from FTAlphaville.

One of the tentative signs of improvement in China’s economy in the past few months has been the apparent reduction in inventory of residential apartments.

Real estate investment was responsible for about 13 per cent of China’s GDP last year, and is a key destination for financially-repressed Chinese household savings, so it’s an important sector.

Yet assessing the true state of housing inventory in China is not easy (shocking, we know). Last month we wrote about a sceptical view of China’s property inventories from Mark Williams of Capital Economics, in which Williams pointed out that only those properties that are “approved for sale” are included in inventory statistics — which probably excludes a lot of finished properties.

To illustrate this, Williams noted that there appeared to be a rather large spike that had appeared in housing starts but was yet to appear in housing completions:

China property starts & completions -- Capital Economics

Anne Stevenson-Yang, the principal of J Capital Research, has another good illustration of this in Tianjin:

The inventory numbers are sourced from China Real Estate Index System (CREIS), which is part of real estate data company Soufun. Again, it only counts properties with “pre-sales permits” in its inventory tally. By this count, the inventory overhang fall from 40 months’ worth in early 2012 to just 17 months’ worth by May.

There would have to be a lot of sales, right?

But there isn’t — at least not in the kind of pattern that matches that of the inventory:

Tianjin sales - JCapital

In October we pondered the motivations for the developers to delay obtaining sales permits — and for local authorities to play along, or not. Of course neither party wants a big crash in apartment prices, so both have an interest in keeping inventories in check.

Stevenson-Yang explains that there are two elements to property sales permits:

– They allow the developer to start taking money for sales
– They start the clock ticking on a two-year deadline (although this is often extended to three years) by which at least one unit in the block will be offered for sale.

Presumably, if you the developer can finance the completion of the project — but can also see that current demand is nowhere near enough to sell many of those apartments, you would delay obtaining sales permits… particularly if you already have some blocks which have been permitted for sale. If, on the other hand, you can’tfinance the completion and are desperate to raise some cash, perhaps you would find a way to make pre-sales without a permit, thereby avoiding the two/three-year deadline for selling a building. Stevenson-Yang says this is routine in Baotou, Inner Mongolia — which she believes is in a debt crisis. But most developers get the permit before selling.

Stevenson-Yang writes:

The reason why the proportion of sales to inventory really means very little is that developers offer for sale only that portion of the inventory that they believe they can collect money for immediately; otherwise, they would lock themselves into a delivery schedule for buildings they probably cannot afford to complete.


It is absolutely routine at property developments to have 20 or 30 high-rise towers, of which only two or three or four are being sold, even if the towers were mostly completed years earlier.This is a key reason why no one can tell you how much inventory is actually available: the numbers given are for the proportion that has received pre-sales permits.

Inventory is really a measure of available financing, says Stevenson-Yang.

She describes two other types of shadow inventory, which further underline how deeply connected inventory is to financing:

– Some developers haven’t met the standards for pre-sales permits, and have to sell through agencies. This inventory is not counted as salable.

– As many as a quarter of units are used as collateral for loan. “These units can be bought: the buyer simply directs a portion of the payment to the bank instead of to the developer. But collateralized units are not counted in available inventory—they are counted as sold.”

The most dramatic claim she makes is this:

The ghost city issue in China, far from being about a few extreme cases like that of Ordos, is absolutely ubiquitous.

The reason is that China’s ‘adolescent‘ property system (for example, there are virtually no property taxes) mean that local authorities are highly incentivised to keep making land sales for developments.

One of Stevenson-Yang’s colleagues flew to Manzhouli, a small city (population 300,000) in Inner Mongolia on the border with Russia. From the plane, she saw numerous developments that were still covered in snow from a snowfall five days earlier.

On our way into town we took a detour out to these apartment blocks. There are no guards, construction workers, or people at all. We went to a nearby village, and they said that most people in the village owned a few apartments for retirement. At the restaurant where we had lunch, I asked the waitress how everyone affords the apartments, and she told them that the local government allows them to put up bigger pieces of land than they currently own as collateral for loans, and most of this land is technically owned by the local governments and is completely unused – it isn’t even farmland.



Houses and Holes
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        • The weight of numbers and a different source of information.

          China has made some mistakes and overbuilt in some instances, but not all instances. For the most part those cities are being filled. Those that are not filled will be discounted and sold at bargain prices. Losses by individual investors and some developers is what happens in any economy.

          The population in China will peak, but we are still some way off that moment. In the meantime they need housing.

          • Oh dear.. China has an under supply / shortage of cities in the right places. I.e. cities close to the CBC (Central Business Cities)

            You can scale up this meme 🙂

          • PF says “Losses by individual investors and some developers is what happens in any economy.”

            That’s weird, to say the least. China is not just “any economy”.

            For example PF, does it strike you as curious that villagers can put up unused land owned by local governments as collateral for private loans?

            That there are no land taxes?

            That the government effectively owns the ghost cities?

            That what happens in “any economy” might actually not happen in China?

          • Evidence of what?

            – The weight of numbers?

            – Evidence of the peak population yet to come (Gunna has supplied that below although exactly when I don’t know)

            – or evidence of market forces?

            As I understand it China has a long way to go in providing modern housing for it’s people who are looking for higher wages and a better standard of living.

          • Arrow2 – Is China the only country in the world that has leasehold land tenure?

            China is different right?

            Did you know that Australia was almost entirely leasehold tenure in the early days of settlement, and many graziers “assumed” ownership of large tracts of land belonging to the crown.

            Issues get resolved over time.

          • Stop being deliberately obtuse. Evidence that the ghost cities will be filled of course. Have they overbuilt or not?

          • Seems to me that from a ‘housing your people’ perspective, they certainly haven’t overbuilt.

            From a ‘providing supply to meet demand’ perspective, they’ve almost certainly overbuilt. Relative to wages earned, I understand China has some of the most expensive real estate in the world. I understand they have large income disparity etc., but their *median* (not average) household income is reportedly around $10,000. With incomes like that, there is no hope of even paying for the concrete used in one of these apartments, let alone the whole thing!

            The hope seems to be that they will grow and incomes will rise etc. so that this level of supply becomes warranted some time in the future.

            I’m skeptical as to the timeframes of this transition. Quick shocks to increase their wages also reduce their international competitiveness – at a time when the world economy is in a slump and unemployment is high. Ala, pushing their wages to a point where they can afford these homes also means pushing them out of jobs.

            It wouldn’t surprise me if this story ends with a glut of houses that are never lived in aging and eventually being demolished while the impoverished live in nearby shacks.

  1. The empty cities are the physical manifestation of the Chinese kleptocracy … errr economy. All that money, transferred from Banks through Regional Govts and SOE’s to developers to….??

    Those transfer recipients sit in elite positions in the Party , where they can influence spending and payment flows from the central trough. Banks are awash in debt, but with such high powered Party aparatchiks as debtors who is going to call it in? This is just one way in which China’s ruling and connected elite make their hundreds of millions.

    Eventually yes, those buildings will be occupied. Long after the cash to build them has flown. A great wash out of debt and asset sales at bargain prices seems likely at some point. But the main game is to keep this patient alive so it can keep on delivering the “goods”.

    • Actually, it’s a recurring theme in Asia. On the scale of things, it appears that Vietnam is looking worse than China for over-building of apartments that nobody can possibly afford. The elite have lined their pockets and the “chosen few” have invested heavily. CBRE, the Vietnamese banks, CBA, ANZ, HSBC, Standard Chartered are loathe to talk about it in any depth.

    • Yes, those buildings that left still standing and maintained will eventually be occupied. (when it all come crashing down and are sold at dirt cheap price) But who is going to end up paying for the debt used to create these buildings in the first place?

      More China zombie banks to come?

      The fact is that EVEN some of the economists in China have acknowledged and are worried about the massive over building issues. It’s no wonder why I read somewhere that suggest foreign commentators and economists are often seem to be more bullish with China’s economy than their own economists!

      I’m sure they know more about their country despite they have never visited or actually conducted any businesses there.

      So stay out of this blind faith BS.

  2. Australia has a lot of similarity’s to China’s ghost cities. We have over built in the wrong places. Right now the Gold Coast and Melbourne have an excess of sellers but over all, Australia has a lot of pent up demand for property.

    China has over built in inner Mongolia but I bet there is a “shortage” in Shanghai.

    Sounds a lot like Australia.