Nicely done video, but I think it gets the story wrong. The bubble is not illogical to start with. Thanks to currency controls most people have no way to invest outside China. The Shanghai stock market meanwhile has huge problems with adverse selection (bad companies pay to list -- successful companies list in Hong Kong or the United States).
There are no property taxes in most of China, so people with money park it in real estate. And developers keep building these assets because they're insulated from loss in any case. If you're connected you can get zero/low cost loans. And local governments are complicit because they make money "selling" the land and don't have alternate income sources.
So no-one really cares if someone builds a massive complex and it doesn't sell: the government and developers are covered by the bank, and the bank is covered by the Central Government. This is just a distributional game in which China pays for infrastructure by using public policy to inflate bank earnings and then banks approve questionable local projects. And sometimes these things make a lot of money, so it isn't as if they're taking a hit on every single complex.
Additionally, these new apartment complexes are often build in "new areas" of the bigger cities, to grow the city. China is trying hard to reach a level of urbanization comparable to the west, so they need to "grow their cities" somewhat aggressively.
I have lived in two of those newly build complexes myself. First there is not much around, roads, maybe a supermarket and a few stores. The local gov't or the developer offer the shop owners rent-free for a year or two to get them to set up their stores in the new area, because there are almost no people yet. But two or three years later, the apartments are mostly filled (either rented or sold) and the shops are paying rent too, new supermarket have arrived, and suddenly the area has become part of the city center.
Same goes for big roads. In the southern part of the town I live in, there is a huge road grid (6 lane roads, etc) already build, but there is only grassland. Come back in five to ten years, and it will be inner city area. Smart to finish the roads before it is crowded.
Here in the city I am in, there is no problem at all selling those houses, and in other bigger cities it is similar. More and more people move to the cities if they can afford it. Better schools, better hospitals, and you Hukou (you "citizen registration card") it will not say "rural resident" anymore; to be a "city resident" is looks much better.
Buyers can be reasonably sure that those new areas will be developed a few years later.
However, for some 3 years now, the state and central gov't constantly come up with new laws to avoid that people buy many apartments and leave them empty. The new property tax in selected cities is one example. An increase in required down payment capital is another (http://usa.chinadaily.com.cn/china/2011-07/07/content_128581...). In the city I am in, you only get a bank credit for your first apartment now, to buy further apartments, you have to finance them yourself.
Buying an apartment is the safest form of investment in a country where the health system is only just being built up, and the retirement system is not widely trusted (yet). It is more the thing of the new middle class. The really rich people will try to get part of their money out of the country as soon as they can. You never know how stable the country will be tomorrow, is usually the reasoning.
Why does the price on failed buildings have to stay high? Why couldn't the government (through a bank, likely) reclaim a bankrupt project, restructure its books and basically "give away" the units?
China certainly has its share of problems. Having lots of extra housing for people to eventually move into is far from the top 10. Something related that is a bigger deal is the energy of heating and cooling housing built without 21st century insulation.
I think its useful to _not_ compare how the U.S. and EU have handled bailing out its financial institutions. China does not have to bail out its financial institutions in the same way if and when it comes to that. They could simply just let the rich take a haircut and give away a bunch of empty apartments to cool the angry masses.
What is Shanghai like these days? In Beijing there is a ton of vacant commercial real estate, but most of it seems to be owned by organizations with no need to lease (else why not lower prices?). Where developments like SOHO are competing is by selling rather than leasing smaller condo-style units. And while the market for apartments has slowed down, there are still people buying. Fifth ring road near Echo's place is 30,000 RMB per square meter.
I wonder more what the actual cost structure is for the complexes cited in these videos. They should be the lowest of all since they're being built on satellite territories. That said, even in a worst case scenario of total default, I wouldn't expect banks to seize the property of people they've been pressured to lend money to. And I wouldn't expect the property to remain "unowned" if it seemed like that would happen. The developers would just sell the assets to a property management company and go nominally bankrupt.
Agree about the differences between China, US and EU too, but my guess is that banks are safe, and that as individual markets get overdeveloped local governments will start adopting property taxes to raise revenue. This is NOT going to be popular with people who've already taken out a 30-year mortgage to buy a 60 square meter apartment, but that coupled with price stagnation should curtail people's tendencies to treat real estate as assets for investment instead of places to live, and push prices to whatever is logical given demographic and migration trends. Soft landing?
From the numbers I've seen, Shanghai is not far behind Beijing...lots of available space in less desirable/developed areas, tight in others, pricing that makes no sense for buying as a home. Certainly, there is nothing "fair" about this.
What do I expect will happen? I expect a lot of people will eventually take paper losses but get to keep the home they live in at adjusted terms. Larger holdings will take losses relative to how connected they are, with a few making out very well. Municipalities will test a variety of tax schemes.
How much social instability will there be in between now and this eventuality? I can't say but can only hope level heads prevail.
What city are you in? You could very easily be describing where I am (Kunming) but I suppose it really applies to pretty much every city in China with >1mm residents.
I'm in Hangzhou, currently the most expensive city when it comes to housing, according to an article I read a few weeks ago. And it'll probably go further up, because there is a new bullet train and Shanghai is now only some 45 minutes away (down from about 2 hours).
(I may move to Kunming later this year, the weather so much better there :)
The bubble is not illogical to start with. Thanks to currency controls most people have no way to invest outside China.
Now wait a sec. The bubble is illogical. That it involves individuals making rational choices in a distorted market doesn't exempt it at all.
In fact, it is a fine illustration of how distorted, artificial markets produce irrational results despite each person making choices that are logical for them.
I'm not sure exactly what 'trevelyan means when he says its not illogical. Though I would use the same term. The housing and public market bubbles, prior to them occurring, were understood effects to China's growth plans. When I say it was not illogical, I am telling you that China's economists and other planners carefully considered this part and parcel to bootstrapping the economy.
How they handle things from here is going to be interesting and a test of the government's ability to reign in corruption and clean up financial loses where needed...and about a thousand other things.
Do you have any references to corroborate your statement that "The housing and public market bubbles, prior to them occurring, were understood effects to China's growth plans."?
I would be very interested how much discussion China's policy makers have had on this question.
I don't think it is a given at all there has been a lot of discussion around this making it to highest levels - the consequences of the US housing bubble clearly weren't expected by US leaders despite the US having many, many intelligent policy makers (some proportion of whom could certainly see the crash coming).
I dunno. The government incentives aren't that big, and people do stupid stuff with and without government help.
There's no doubt that the government (and neo-liberal mainstream economists) failed to prevent the bubbles.
But there's other factors at play. Housing takes a long time to reach an equilibrium. It can take decades for people to move out of a house that's too big for them. The market just doesn't respond quickly, which is a recipe for instability and chaos (just ask anyone who's studied control theory, or chaos theory).
There might be a few players who are smart enough to see this, but the average real estate investor isn't a Wall Street quant, or even a trader. They are a 20-or-30-something year old, with no financial nous at all. They see 10 years of solid growth (due to demographic changes, income growth, and government intervention), jump on the wagon, and that creates a little more impetus.
Do you really think that the government is entirely pro-cyclical? That they choke supply, and give out free money while prices are rising; and increase supply and curtail loans while prices are falling? I doubt it. And if the Chinese government is to blame, why is it so damn regional? The Shenzhen bubble is nothing like the Beijing one, which is nothing like the Shanghai one, which is nothing like the Inner Mongolia one. Some of that is local government actions, but I dont't think it is in most places.
Government incentives aren't that big? In the US or in China?
You think empty cities crop up all on their own? With no rents being collected, you think people will just keep building and tying up their capital for no reason?
If you mean the US, the incentives are not trivial. Interest rates are a big one and they are kept artificially low. You can write off your interest. You don't have to pay capital gains taxes on the first $250k of profit on a house.
There are first time buyer programs too. And standards for lenders were greatly relaxed around 2000, with borrowers no longer required to put 20% down.
Fannie and Freddie also helped by accepting the risks of loaning to buyers with less than adequate credit. Lenders had no incentive to even check the claimed income of buyers.
So, not sure how all these things aren't that big. I guess housing prices just double on their own for no reason.
First off, bubbles can have many causes. Cheap, stupid credit, feeding off itself can be the main one. The government regulates credit; so ultimately it failed its duty if credit blows up. I'm just not sure if this is your point, or if you think prescribe to the "the market knows best, any problems are caused by the mere presence of the government, and wouldn't be caused in a free-market utopia" philosophy of Alan Greenspan, the guy who arguably caused the GFC. Government inaction, and government action both can cause damage. The government does have a part to play (IMO), and sometimes it does play it badly.
Which empty cities? The one in Inner Mongolia? That was the fault of the local government.
The one in Shenzhen, where the prices are really fucking high? There is no empty city in Shenzhen, because rich investors are buying up apartment at 10-40 times the median income. Crazy investors.
There's a huge demographic component to the bubble, too. There's a massive cohort of 20-30 year olds, and bugger-all 10-20 year olds. Because rich people have less children (and there's the One-Child thing, but even if there wasn't the numbers would be similar). Guess who is looking at buying a house? Guess what will happen to demand, in 10 years? That's what I'm talking about, when I say that demographics can have an effect.
Now, we come to interest rates and inflation. Artificially low interest rates in China, yes. They can buy gold, or invest, or buy houses; but due to the massive gains that houses have been showing (due to demographic effects, and income gains I think) they pile onto houses, causing a bubble. The government pushing construction projects MITIGATES this, though they could end up overshooting (yay, apartments for poor people).
During the Great Depression, the gold standard screwed things up, as the government had their hands tied and couldn't do QE. Did the government also cause the Great Depression, by sticking to the gold standard? No doubt, if you look to blame them for everything.
I'm not claiming non-empty cities are built by crazy investors.
I don't know whether particular empty cities are caused by local or national government in China, or both. I was merely arguing that government was distorting things with incentives or coercion.
Cheap stupid credit's the cause? I agree. But in a free market, government does NOT regulate the cost of borrowing money. That's governed by supply and demand in a free market. The US is not a free market in this respect. Neither is China.
The gold standard was not the cause of the Great Depression; the collapse of the investment bubble created by the Federal Reserve, along with the interruption of international trade by the Smoot-Hawley Tariff Act caused the initial problem. Subsequent interference in the economy by both Hoover and FDR extended the problems.
The gold standard merely prevented the government from inflating away the dollar and using inflation to hide the consequences of other bad policies. Its a form of discipline that the founders wisely put in place to prevent the disastrous policies that many other governments have perpetrated throughout history.
But now the constraint of the gold standard is off and much larger bubbles can be created.
I'm pretty sure that fundamental economics are the same the world around - if there's no end consumer for your product, then there's a loss somewhere. It doesn't matter who covers the loss, but there's still a loss and it's not correct to say that no-one cares.
The biggest fallacy I've heard recently about this housing situation is the oft' repeated "things are different in China" - you can't argue with basic maths like this. Surely the 2008 economic crisis was triggered by a similar situation, with western banks and investors ignoring fundamental economic equations?
oh, and another thing - people have no way to invest outside of China? What?
Any quick google search will tell you about the hundreds of millions of government money being embezzled by officials outside of China, not to mention rich Chinese citizens legitimately taking American citizenship and investing their money overseas...
There are no property taxes in most of China, so people with money park it in real estate. And developers keep building these assets because they're insulated from loss in any case. If you're connected you can get zero/low cost loans. And local governments are complicit because they make money "selling" the land and don't have alternate income sources.
So no-one really cares if someone builds a massive complex and it doesn't sell: the government and developers are covered by the bank, and the bank is covered by the Central Government. This is just a distributional game in which China pays for infrastructure by using public policy to inflate bank earnings and then banks approve questionable local projects. And sometimes these things make a lot of money, so it isn't as if they're taking a hit on every single complex.