60 Minutes does China’s property bubble

Find below an entertaining video from the US 60 Minutes program (h/t Gunnamatta) on China’s ghost cities. It’s actually pretty good, though not terribly encouraging for Australia. If you ever wondered how Australia got so rich on the most commonly available commodities known to man, this will give you a good idea.

Comments

  1. Word has it that the Chinese mandarins will keep building these ghost cities as long as they can. According to the Daily Mail, China has plans to build 20 more cities just like these every year, for the next 20 years. In other words, for Chinese Communists, the appearance of growth and expansion – even if it is completely empty and void of substance – is better than no growth at all.

    • The crowning absurdity, to me, is that all of this newbuilt stuff is absurdly expensive due to all the capital gains pocketed by CCP officials and cronies, on the land. If it was as free of capital gains as developments in Houston, then the 500 million Chinese who are still in poverty might actually be able to move up into the urban economy instead of remaining in rural subsistence or informal slum housing.

  2. Scary. Seriously scary.

    Remember this video the next time you read another urbanisation spruik from 3d1k, GSM et al.

    • Lorax, Bill Bishop who knows a thing or two on China commented on the CBS News story as follows:

      CBS “discovers the “ghost cities” that have been covered ad nauseum, interviews the usual suspects who have been making their mostly reasoned arguments for a while, nothing new for those who have been paying attention. minute 6-7 is kind of funny, Gillem Tulloch gives a guess in response to a question, appears to have never heard of the possibility of 回迁房. don’t get me wrong, some of china’s real estate markets have big problems, but this segment isn’t going to make you smarter about what is going on…”

      I agree with him.

    • I’ll point out that there is a distinction between “urbanisation” with a massive racket in capital gains in raw land values going on, and urbanisation in a genuinely competitive free market with minimal capital gains in raw land values.

      Because the new “growth corridors” of the USA have the latter, industries are actually choosing to locate there instead of China, believe it or not.

      http://online.wsj.com/article/SB10001424127887323549204578315714070017932.html?mod=djemEditorialPage_h

      http://www.manhattan-institute.org/pdf/cr_75.pdf

      • “a genuinely competitive free market”

        like the one in the Republic of Utopia or better known as “growth corridors of the USA”

  3. bskerr2MEMBER

    Think of the really big problem, when it bursts so does Australia’s economy and since Australia has exported so much manufacturing and services it does not look good. But then I thought this might happen so I started offloading everything I own 6 months ago, not much more to go, if/when it goes pear shaped the cash that I got OK prices for can go into cheap country land for a while. When it crashes everyone offloads together and everything someone owns becomes worthless.

  4. “45 times the average annual salary, or more”

    now that’s what I call overpriced property, you whingers 🙂

  5. GunnamattaMEMBER

    I feel a tad embarrassed.

    I only got the link from Brooke Corte courtesy of someone elses retweet.

  6. So, for the investors the only return they are banking on is capital gains? Do they also have some incentives in racking up debt like negative gearing, otherwise without rental income how can a middle income earner afford more than one or two?

    • “….So, for the investors the only return they are banking on is capital gains?…”

      I would say this is most of the motivation. It is very helpful to see the absurdity of a concept when its most extreme manifestation is presented. Australia’s RE market is merely not as extreme, but the concept is the same wrong one.

    • no, they don’t have any thing like that; they don’t even have permanent ownership of the properties either. Most of properties are officially 70 year lease hold and everyone is hoping that when the time comes the future government will figure out something for them 🙂

    • Chinese have a superstitious belief that past residents leave behind their energy so most people want to live in brand new homes without any ‘ghosts’. Having tenants live in a property results in a capital loss.

  7. Not to put a bit of cold water over this story as well. I’ve been to ZhengZhou twice and the east side is starting to emerge with life. There was way more cars on the street than in that video. Most ground level shops are filling up.

    The east side is particuarly expensive compared to other developments. It’s like they built to many BMWs with not enough buyers willing to pay their price.

    Compared to the west side of the city which is building a lot more cough, “affordable houses” which are selling like hot cakes. Miles away from the old city centre.

    Is there a building bubble in China? Yes. Is it slowing down…a bit, but this will probably have a few more years to play out yet…but no where near a decade.

    There is still a lot of strong political will to prevent a crash at all costs.

  8. China RE has the same over valued characteristics as Australian RE and ultimately the same average wage to RE value ratios must normalize.

    Maybe wages go up, maybe RE down maybe inflation simply tames the beast, at the moment it is really impossible to tell.

    I know from personal experience that it is difficult to get a good apartment to rent in a city like Shanghai rentals are over 20,000 RMB/month for nice 3 bdr apartments, and that’s local rates you can double that for expat “package laowai’s”

    Part of the problem is that these newly constructed apartments are not really internally finished out. The owners often take possession of the apartment as a concrete and glass shell. Builders put in the cheapest windows they can find, bathrooms are often just the taps poking out of the wall. This is the typical finish out for new apartments.

    Typically it will take at least another 200K RMB to just make an apartment livable and more like 400K RMB for a nice level of finish out.

    If the new owner is financially stretched they will typically leave the apartment vacant “as delivered” until they have the money to complete the finish out. In this way apartments are like a form of “land banking” where the apartment is owned in the least improved state possible.

    SO WRT to the CBS report, yes these towns exist but somewhere there is an owner making payments on the loan. In China there is no way out of these loans, there will be no repeat of the US/Cal “jingle-mail” In China you are stuck with the loan, I believe it even continues as an estate debt that must be paid by the next generation. So RE loans are serious business in China.

    • “I believe it even continues as an estate debt that must be paid by the next generation.”

      Not really. Most cases are the same as here. Bank repossession occurs unless the property is transferred. But there are certain loans can be applied that are cross generations. 父债子还 子债父还 are both possible.