China’s historic property overhang

China_ghost_city4

An article at Forbes today is very much worth your time. Titled In China There’s Not One City Without Terrifying Stretches Of Empty Houses by Anne Stevenson-Yang of J Capital Research:

Over the last two years of traveling constantly in China, I can say that I have not seen a single city, town, or hamlet without massive empty housing stock. A colleague, on two trips crossing about 1,500 kilometers overland, said that he was not out of sight of empty buildings even once… 

…For those who do not believe travelers’ tales, there is the Chinese government’s own report, from 2010, concluding that home ownership rates in China were then nearly 90%. This compares with a world average of 63% and a U.S. average of 65%. The report also concluded that 15% of Chinese people own more than one housing unit.

…In fact, the unique class of person who does not own a home in China is the migrant worker who is supposedly the target of the nation’s “urbanization.” Any government official knows what few external analysts seem to: that Chinese urbanization is not a migration of populations. Instead, it is the re-designation of a piece of agricultural land to “urban” so that it can be sold for a much higher value. Urbanization Chinese-style, meaning urbanization in situ, forces agricultural populations from their land and into nearby highrises, where they are employed as maintenance workers or simply given extras units to rent out for income—should they be able to find renters. Urbanization thus destroys jobs rather than creating new employment.

…Now, the oversupply of housing seems to be converging on a single number that is roughly equivalent to 25 square meters per person, or units enough to re-house the whole population of an area. Prices also are converging, on a range of 5,000 Renminbi per m2 to 10,000 Renminbi in each city, depending on how luxurious the housing but regardless of where the city is or what level of income is average for the population. 

…What this means is not that that housing in China has become a new type of tradable and fungible commodity something like wristwatches or jewelry or indeed piles of copper or gold. The purchased units are left empty, because renting them would depreciate the value of the real estate; living in the housing is actually an impediment to realizing its value.

It is impossible to know with certainty when the property bubble will burst, but burst it will, and anyone visiting China five years from now will be lucky to find prices at 60% of the current values. 

This reminds me of the last time I was in China and I flew from Hong Kong to Beijing on a clear day yet did not once see the ground through the smog. That’s almost 2000kms…

It’s really hard to imagine the magnitude of this unless you’ve been there.

I suggest you read the article in full.

Comments

  1. “The purchased units are left empty, because renting them would depreciate the value of the real estate; living in the housing is actually an impediment to realizing its value.”

    It would probably not be remiss to conclude that the Chinese have the same attitude to their foreign property investments as well.

    Interesting times.

      • Would love to see some figures on how many intentionally empty units/apartments we have in Melbourne, but I understand if these aren’t collected. The Victorian rental vacancy rate of 2.9% seems way out of whack with all the unlit apartments you see driving through Melbourne after the suns gown done.

      • I think it fair to say that Melbourne is already China’s first offshore ghost city…

        😀 Man, that was a good line!

        Gotta remember that one….

  2. I know of several very large development firms who have put the breaks on their acquisition teams and ordered them to sell ALL sites that won’t be complete in the next 3 years.

    They are based mainly on Australia’s east coast.

    • Yes, I’ve heard the same as well from a mate in the industry (strata management). Apparently Macquarie Bank gave a members only review advising along those lines – that after three years, any undeveloped sites will be worth squat.

      • Obviously, they weren’t that explicit, but the takeaway was that the market has topped out (albeit with a bit more froth to come) and it will be a big correction.

      • flyingfoxMEMBER

        I tend to believe Macquarie a bit more than anyone else because they tend to be once removed from the action.

        I wonder if they will get out of the mortgage business as well.

  3. flyingfoxMEMBER

    This is what the Chinese money is fleeing, not necessarily the government. Private equity is selling up property mainly in Hong Kong and smart money is following suite. I think they realise that property boom has run its course.

    http://online.wsj.com/news/articles/SB10001424127887324789504578384220036108516

    Similar articles if you google them. If this does not pop in an orderly fashion, the world is in a bit of hurt and 60% seems like too optimistic of a number as it is all about confidence.

  4. Different but similar in some aspects is Australia’s own ’empty’ house reality – and I’m not referring to investment properties left empty. We seem to have a blind spot to the totally underutilised space in your average Australian sprawling bungalow. How many rooms are actually fully used or necessary? We possibly have as much ’empty’ accommodation as China in proportion to population.

    • We possibly have as much ‘empty’ accommodation as China in proportion to population.

      That is an extremely valuable contribution Geof.

      You might also be interested in something I have discovered about our cars. Most cars spend more than 95% of their time sitting unused with the engine off. When they are being driven, most cars have 75%-80% of the seats vacant.

      What do you make of that?

  5. reusachtigeMEMBER

    Oh geez. Not more ridiculous bubble popping talk. “It will pop one day I tells ya!” says the 90 year old renting Gen Y.

    The cool people are buying IPs and are busy attending all the BBQs they’ve been invited to.

    Bubble talk does not help your cause.

    • It’s so bleedingly obvious that a mean reversion in property prices is in our future that all those currently saving money for a home purchase should take heart.

      Patience is a virtue.

      Find something else to do with your time other than obsessing about owning a home.

  6. This is why we don’t want to import China’s rapacious and socially destroying appetite for property to Australia.

    We only have to look at what is happening with our cousins in Canada to see what lays ahead for us.

    http://www.theglobeandmail.com/news/british-columbia/vancouvers-vacancies-point-to-investors-not-residents/article10044403/

    http://www.scmp.com/property/international/article/1258574/rich-foreign-investors-drive-home-prices-vancouver-locking

    Is this what we really want to happen to us too?

    • “Is this what we really want to happen to us too?”

      No, but it is already happening. That’s why we’re suddenly seeing articles in the MSM saying it’s xenophobic to think that the Chinese are buying and bidding up prices. They think they’ll be able to convince us that we’re imagining that Chinese can squeeze out the locals.

      • Yes it’s a confidence trick aimed at deceiving the public, all the while protecting their own self-interest.

  7. Putting aside the empty building issue, here’s what really stood out for me:

    “Chinese urbanization is not a migration of populations. Instead, it is the re-designation of a piece of agricultural land to “urban” so that it can be sold for a much higher value. Urbanization Chinese-style, meaning urbanization in situ, forces agricultural populations from their land and into nearby highrises, where they are employed as maintenance workers or simply given extras units to rent out for income—should they be able to find renters. Urbanization thus destroys jobs rather than creating new employment.”

    They’re urbanizing agricultural land? Is that productive agricultural land – presumably? Are they nuts???

    • Probably don’t care when they have their eye on buying land up in Africa and Australia to feed their masses.

    • I took a train from Beijing to Xian two years ago and noted two things:
      1. Filthy skies the whole way, and
      2. Every tract of agricultural land was spotted with patches of high-rise apartments, even when there were vacant brown-field sights adjacent to them.
      Things looked out of place to my eyes.

    • “They’re urbanizing agricultural land? Is that productive agricultural land – presumably? Are they nuts???”

      No, they’re not nuts. They’re buying up Australian agricultural land.

  8. I flew from Hong Kong to Beijing on a clear day yet did not once see the ground through the smog

    And just think of all the CO2 released by the making of all the billions of tons of concrete that went into making those empty cities and apartment blocks …. 😯

    We’re all going to pay the price, and it’s going to be especially hard on the next generations.

    • What’s interesting is that Telstra are somewhat doing the same thing. They’ve sacked all their contractors and new position’s are being sourced internally by existing staff from departments being shutdown.

      The irony is the new positions are in new technologies where the delivery was outsourced, they are slowly realizing that nothing has been written down. No one knows how the new figamajigs operate.

      • the new positions are in new technologies where the delivery was outsourced, they are slowly realizing that nothing has been written down.

        YAGNI documentation. I like it.

  9. notsofastMEMBER

    This article gets close to saying a word that needs to be more closely associated with much of the building that is occurring in China, particularly outside the tier 1 cities. Welfare.

    Because the locations of new buildings are generally uneconomic for people to live in, when almost all of the economic activity around these new buildings is related to building these new buildings. Then for people to eventually live in them they will require a significant redistribution of resources to them and away from other more productive areas of the Chinese economy. This is Welfare I would suggest that China will not be able to afford.

    It appears to me that China is creating buildings that the country will never be able to afford to effectively utilise.

    This creates a number of questions that I think need answers most important of which are:
    What was the CCP thinking when they allowed this building program to develop? And why were they thinking this?

    I suggest that only once these questions are credibly answered will the Chinese leadership be able to create enough trust and confidence with the Chinese people that China will be able to find a way out of the building mess it now finds itself in.