China housing a “bubble on eve of destruction”


Cross-posted from Investing in Chinese Stocks.

Below is an op-ed by Gu Jun, a professor of sociology at Shanghai University, talking about the empty residential buildings all over the Chinese coast as a metaphor for the failure of central planning. He closes by tying it to Premier Li Keqiang’s reform efforts. This op-ed was the top headline in the real estate section of iFeng’s website on Sunday.

The title can roughly be translated as “this bubble is on the even of destruction.”  Here’s is my incomplete summary (not a direct translation):

This bubble is not in Wenzhou, Ordos or Yulin, but on the shore. It is in Dalian , Yingkou, Qinhuangdao, Yantai, Weihai, Qingdao on the Shandong Peninsula, in Huizhou, Sanya and Beihai in the south, where the “ocean view apartment” is on the eve of destruction. Many rushed in to buy homes, but when night falls there are dark, empty buildings. In 2008, in Weihai, Shandong, homes were bought for more than ¥500,000; today they sell for ¥200,000, but there is little interest. There is a price, but no market.

When insiders describe the chaotic development of the coastline, they give three reasons. The first is that the timing wasn’t right, and they “over drafted” the coastline’s resources. The second is a lack of good planning; the developers moved as a herd and destructive development followed. Third, there was no core industry support, without a healthy ecosystem it could not continue growing. Valuable coastal ecosystems were destroyed, plans for scenic development fell through, now there is only a concrete and rebar forest, in the still of the night there are only a few lonely lights for comfort in this sad and lonely place.

This so called “coordinated” development, where government makes the decisions instead of independent actors, has turned into uncoordinated confusion. The BATs fly overseas (Baidu, Alibaba and Tencent), there is fake packaging scandals and shoreline destruction. Yet people still believe the government can implement the highest reason, they have a superstitious belief in planning, that government will somehow deliver long-term planning for the good of all society. Government is just another interest group though, and in the race to get promoted, officials pushed development to get ahead.

From the official’s standpoint, coastal ecology has nothing to do with me; fishermen, farmers and city residents need for a supply chain has nothing to do with me; scenic development needs what type of development and continuous promotion, has nothing to do with me; if the home buyers can even see the ocean, has nothing to do with me. It is the same with the losses in high speed rail, the world’s fastest M2 growth, and the investigation of the “tigers” and “houseflies.”

With this background, go back and understand Li Keqiang’s statement, “Whatever the market or society can do, will be left to the market or society” and the State Council’s powerful push to eliminate administrative approval, it is not hard to understand the meaning. Government and planning are the same as human reason, they are imperfect and flawed, waiting for the spontaneous action of countless individuals to correct.

Houses and Holes
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  1. Planning liberalisation is the closest thing there is to an economic silver bullet … Mark Bourne … Institute Of Economic Affairs … City Am United Kingdom

    … extract …

    The case for a liberalised planning regime for housing has been made extensively on these pages. Constraining development through artificial boundaries such as green belt restrictions is acknowledged to be a key driver of high price inflation. As our incomes rise, we demand more space. Rationing this space pushes up prices directly, and over time leads to a host of other negative consequences. To highlight the national scale of this challenge, a recent report by Demographia ( ) showed how the ratio of median house prices in an area to median incomes is lower in Washington, DC and Chicago than in Swansea or Stoke-on-Trent and Staffordshire.

    • A clear structural definition of an affordable housing market …


      For metropolitan areas to rate as ‘affordable’ and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household earnings. To allow this to occur, new starter housing of an acceptable quality to the purchasers, with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual median household income of that urban market (refer Demographia Survey Schedules for guidance … ).

      The critically important Development Ratios for this new fringe starter housing, should be 17 – 23% serviced lot / section cost – the balance the actual housing construction.

      Ideally through a normal building cycle, the Median Multiple should move from a Floor Multiple of 2.3, through a Swing Multiple of 2.5 to a Ceiling Multiple of 2.7 – to ensure maximum stability and optimal medium and long term performance of the residential construction sector.

      • A significant reason for the poor understanding of housing bubbles within the (so-called) social science professions go back to the time of the introduction of econometrics (Paul Samuelson) in to economics … where modelling was wrongly seen as a substitute for common sense and empirical evidence / observation.

        As eminent economist Thomas Sowell has made clear “We have spent the past few decades replacing what works with what feels good”. Most economists wouldn’t know a house market from a horse market.

        Urban planning is even worse. If it doesn’t work and nobody wants it, they will be taught the polar opposite. These so-called schools are best described as “Bureaucratic Indoctrination Camps. They are taught what is in an expanding and weakly governed bureaucracies best interest .. and against the wider public interest. Soundly governed Local Authorities do not employ the “victims” of these indoctrination camps, as they just create mayhem in their communities. The sooner they are shut down … the better.

        Anyhow … here is what I wrote back early 2009 … HOUSING BUBBLES & MARKET SENSE …

      • New Zealand is the most advanced internationally in politically dealing with these essential housing / Local Government reform issues … refer

        International researchers and advocates need to take particular note of the on-going outstanding research by THE NEW ZEALAND PRODUCTIVITY COMMISSION … housing affordability … regulatory performance … and now just getting underway … urban land supply impediments ….

        Productivity Commission of New Zealand

      • China’s unsold housing stock soars 190pc over four years | South China Morning Post

        … extract …

        The mainland’s inventory of unsold housing stock has soared 190 per cent over the past four years, in a further sign that the downturn in the property market is deepening.

        Unsold residential floor space rose to 561.6 million square metres by the end of August, 1.68 per cent higher than at the end of July, National Bureau of Statistics data showed. The increase extends to 29 months the growth in unsold stock, which will take 10 months to clear based on property sales volumes last month.

        The relentless expansion in housing stock yet to find buyers has been attributed to growth in property investment, land supply and housing construction over recent years.

        Although local governments across the mainland have eased restrictions on the purchase of second homes, Centaline China research director David Zhang said such measures had limited impact in restoring buyer confidence. “The banks have to relax the conditions on property loans,” he said. “Otherwise the property market will not recover.”

      • China Economy: This Stimulus Has Short Legs – WSJ
        (google search title if blocked) … how much heads out via the Macau casinos ?

        … extract …

        China’s latest stealth stimulus is no bazooka.

        Though there’s been no official announcement, the central bank is reportedly lending 500 billion yuan ($81 billion) to the country’s top five banks, after an ugly set of data showed the economy has entered another bumpy patch.

        The amount seems large—equivalent to the liquidity released by a half-percentage-point cut to bank reserve requirements. And while the money is supposedly earmarked for small businesses and affordable housing, benefits will no doubt trickle to beleaguered property developers choking on a rising inventory of unsold homes.

        But unlike a reserve-requirement or interest-rate cut, this move doesn’t have long legs. The money comes in the form of three-month, low-interest loans to the banks. The loans could be rolled or augmented, but they could also easily be extinguished at the end of the term.

  2. From another article on the same place, while places are listed for 200K RMB, the owner will settle half that. That is a 80% decrease from the peak at 2008.

    The local government is now trying to turn some of them into retirement villages, but there are simply too many buildings to convert. No schools, no factories, no hospital, no shops, just miles and miles of empty buildings…

  3. I thought it had more to do with a *lack* of planning: “whatever the market or society can do should be left to the market or society”.

    Looks to me like in their rush to maximise development and growth, they encouraged capitalist speculation en masse – it hasn’t worked so well.

    • At face value it may look that way but the driving forces for the Chinese property market are a combination of:

      1. A dysfunctional model of provincial and local govt financing – the govt is the land banker and land banking and development pays the bills.

      2. Rampant corruption

      3. Town planning that is the servant of the above (build, build build) Town planning is great at under building AND over building. Getting the price, timing, volume and mix that an organic and changing community requires is what Town Planning is bad at doing.

      4. A national that loves a gamble / get rich scheme

      5. Plenty of credit to juice all of the above.

  4. talking about the empty residential buildings all over the Chinese coast as a metaphor for the failure of central planning

    Lack of central planing and regulation was a metaphor for real estate failures in Spain, Ireland, US, Australia, …

    it seems that none of the existing economic models is able to deal with real estate greed, clearly we need a paradigm shift

    • No paradigm shift needed, really. Just a return to what worked relatively well in the 70’s and before. Ration debt. If you have surplus funds from a business of any type, be it a manufacturing plant or from the sale of existing property, then by all means buy as much property as you like! But if you have to borrow to do that, then limit that capacity to, say, 70% debt, capped by it being funded by no more than 30% of disposable income; whatever that income is. To establish that mechanism, make lenders liable for any debt if they ignore that criteria, and let’s see how much mortgage funding the banks plough into residential property, knowing that the borrower can walk away from all of it, if the ceilings have been breached!
      Back, to the Future, one might say…..(NB: The idiotic planning restriction didn’t apply back then either…)

      • “Ration debt.”

        Got it in one Janet.

        The reason house prices were so much lower when I bought about 15 years ago now is that Mr and Mrs Average simply couldn’t borrow these huge sums of money.

        You can make a million arguments about planning restrictions et al, all of which are valid points. But at the end of the day, if you can’t borrow a million bucks, you can’t spend a million bucks and the price cannot inflate accordingly.

      • +1 Simple, elegant and fair

        If you can’t borrow a million you can’t spend a million. So many houses have been there for 50+ years yet have increased in price beyond all reason – except access to immense debt.

    • Unfettered housing development is just one symptom. The global tragedy of converting ecological assets and environmental assets to interest payments to the usury machine continues apace.

      • I saw those David graphs as well yesterday.

        Those multiples are amazingly high.

        And the position that the banks appear to be in are very bad indeed.

        I thought that I could no longer be shocked when it came to the housing related problems in Australia but seeing those figures made me let out a little gasp.

        The collective stupidity of FIRE and the politico-housing complex has now reached this level:

        “We’re happy high retardians”

        The hangover from this binge is gong to be huge.

      • The Patrician … No … I hadn’t seen this excellent post by Lindsay … and many thanks indeed for drawing it to our attention.

        It is a shocker.

        Some MB readers who haven’t read it, may find the 5 January 2014 article of mine CHINA: BIG BUBBLE TROUBLE of interest …

        As one who takes a structural approach to urban economics ( What part of 3.0 don’t they understand ? ), let’s just say in the kindest possible terms, the housing bubble problems were / are all eminently predictable.

        In taking the structural approach, they will all find out (some appear very slow on the uptake ) that there is about $A2.5 trillion of bubble value to wipe out of the Aussie housing market … about $NZ400 billion out of the New Zealand one. And I’m not brave enough to publicly state my estimates for China … which is going to make the 07/08 GFC look like a walk in the park..

        That’s housing, commercial and infrastructure mal-investment on an epic scale. The Mother Of All Bubbles.

      • @ Hugh,

        Your memory seems to be very selective. You should read more about Texas S&L debacle of 1980s.

        S&L failures, demolitions of thousands of newly build homes (Empire Savings I30, etc), rise in vacancies, house price collapse (35-40% in Houston, 20% in Dallas), mid 80s Texas recession, … all fueled by speculative lending in RE,

        not much different than today in some other places

        newspapers from 1988

      • DoctorX … the S&L fiasco has been well covered. The reality was there was just a “blip” in the Median Multiples through that frenzied financing fiasco.

        Indeed … if my memory serves me correctly, Leith covered this in one of his articles. PhilBest has also contributed much helpful information as well.

        Like the Germans / Wiemar Republic “lesson” in hyperinflation for the Germans , the S&L exercise sure has seared in to the consciousness of Texans the importance of sound money / lending.

        From a structural perspective, the most important things we can learn from Texas are … (a) its liberal land use policies … and (b) its superior Municipal Utility District (MUD) infrastructure bond financing model … the worlds best.

        We need to be like the Japanese car-makers following WW11, who went to Detroit to learn how to build cars more efficiently. they didn’t copy them in building “clunkers”. They came back to produce the best and most reliable cars the world has known … almost sending their teachers broke in the process !

        Why cant we be clever too ?

      • Median multiple during bubble in TX in 80s was not high like today’s but that was the case everywhere (including land restricted California) so clearlt that cannot be attributed to perfection of Texas planing system

        reason why Texas didn’t have bubble last time around can be found in Enron fiasco and oil boom

      • Re the Lindsay David article – and suburb property multiples – a chart showing mortgage values for these suburbs as well would be illuminating. I suspect owners just have huge equity built up over the years so the mortgage to income ratios would not be in double figures.

      • DrX:

        The first part of your comment made sense. BUT:

        “reason why Texas didn’t have bubble last time around can be found in Enron fiasco and oil boom”

        Wouldn’t that be all the more reason to HAVE a bubble, not a reason NOT to?

        Also, how do you explain no bubble in several dozen US cities not in Texas at all?

        The obvious explanation, using academic analyses of housing supply elasticity, is that ALL the cities with elastic housing supply, had no bubble. Simple. No difference where they were: Texas, Kansas, Indiana, Tennessee, North Carolina, etc etc.

      • @ PhilBest

        I will turn question around: how it was possible to have the largest property bubble of 1980s in Texas that at the time had the most elastic housing supply? It seems to me that elasticity of supply doesn’t play important role because bubbles happen in places with and without elastic supply.

        The reasoning behind my comment that enron fiasco and second oil boom are responsible for avoiding housing bubble in Texas is purely based on “trading psychology”. People in Texas got burned during oil boom of 1980 and than again in early 2001 (just before new housing boom). Their confidence was shaken by Enron and it wasn’t hard for them to recognise in early 2000s similarities with 1980s housing boom.

        As you know housing bubbles are “greater fool” episodes driven by pure psychology and allowed by easy credit. With same supply elasticity in 80s and 00s and same credit availability people’s behavior produced two opposite outcomes. It’s more than likely that fresh memory of big financial loses in similar situations played crucial roles. When new bubble started inflating around USA, Texans were recovery from huge losses caused by Enron and remembered the previous RE crash happened just over decade ago. Only fools would go for new RE boom under those conditions.

        other places you mentioned didn’t have bubble because everyone was aware that nobody would ever move to these undesirable places anyway. Lack of prospects for future demand (not supply) make people cautious.

      • DoctorX … it is critically important to clearly understand the structural definition of a housing bubble.

        When housing exceeds 3.0 times annual household incomes … and as a check measure if the Total Housing Stock Value exceeds at tops 1.5 or ideally 1,2 times GDP, it is a guide there are land supply / infrastructure financing impediments to normal new housing supply that must be addressed.

        Texas did not bubble through the Texas S&L crisis mid to late 1980’s as Leith van Onselens of MacroBusiness Graph within this article clearly illustrate …

        A free economics lesson on bubbles for Hockey and Costello (and Kohler) | | MacroBusiness

        On the issue of Total Housing Stock Value to GDP, you may find the James Gruber / Forbes Table within this article of mine of assistance …

        New Zealand’s Bubble Economy Is Vulnerable | Hugh Pavletich | Scoop News

        Do read closely the schedule of 10 annual Demographia Surveys and a structural DEFINITION OF AN AFFORDABLE HOUSING MARKET at .

        This is by no means a complex issue. The only things complex about it is the tiresome political inertia / incompetence with the parasitic special interests feeding off it … at the housing consumers and wider societies expense.

  5. Is this article arguing that building apartments in China is too liberal, and the government should restrict and not approve the building of new properties?

    • With 50m vacant dwellings and a stagnating population it is incomprehensible that they are still building houses.

      • Well, only now are they having trouble selling those new apartments. In prior years demand actually outstripped supply.

      • … and I suspect that due to the endemic corruption, much of the so called property investment could be described as “fake demand”.

        iI would appear those days are coming to an end … rather severely and quickly.

        The Communist Party knows it must win on the anti-corruption front … for it’s own survival.

        My sense is that the Chinese Authorities are endeavouring to transition China to a Singapore … on a truly massive scale.

      • Not only corruption, ordinary people have this housing mania as well. Over there, you will not get a wife if you rent. It’s like a pre condition for marriage to own or to mortgage a home.

      • Kevintx … You are quite correct about the social pressures on the young Chinese. One serious aspect of this that most certainly has not been adequately researched and reported on, is what must be the truly massive inter-family “under the radar screen” lending / financial support that must be going on. No doubt too the Chinese are in no hurry to inform their political masters of much of this. I really would like to know how it all works.

        When you are talking Median Multiples for Hong Kong at about 15.0 (Demographia with Shanghai noth of 15.0, Beijing north of 20.0 (Thomson reuters) and the 100 major metros north of 8.0 overall (E House … likely understated … access via my article CHINA: BIG BUBBLE TROUBLE ) and the hefty deposit requirement’s, there is simply no way the vast majority of these young people could get in to housing without substantial family support.

        Where is the essential research ?

      • Kevintx … Do make a point of reading closely PLANNED CHAOS by Ludwig von Mises (hyperlink at top of thread) to gain an elementary understanding of how command economies / bureaucracies behave … something that is remarkably poorly understood.

        Business people are surprisingly often the most clueless … not realizing the massive risks associated with Crony Capitalism and becoming dependent on the State for commercial survival. Companies that do this are on the path to their own destruction … something most don’t realize.

        In essence … command economies / bureaucracies are all about image to hide / mask failure and “making the numbers”. The latter being in most cases a fiction.

        There is much to be said for open and honest markets … in contrast to closed and dishonest ones !

        The Chinese Government is going hell for leather to move from a command economy to a market one … because it knows full well the Communist Party will not survive in China if this transition fails. They know that a lot better than we ever will !