Tuesday, October 1, 2013

The China Real Estate Bubble

The two most troubling things about visiting China are the smog and the scale of the development boom. It is going on everywhere.  Big cities.  Minor cities with little to offer tourists, but it has the provincial government and a big manufacturing base that perhaps can justify so much construction.

The wonderful HBO news show Vice did a very interesting story on the real estate problem in China.  They visited acre after acre of multi-story housing developments that were basically sitting empty and deserted.  Brand spanking new.  The episode is available on youtube.  Check it out.

These apartments are designed for families. A couple's starter apartment will often be three bedrooms; one for the parents, one for the kid, and one for grandma who takes care of the kid while the parents work. We're talking a thousand square feet on average.


The scale of the development really is beyond comprehension. Thousands of buildings, packed together so that you could spit across at your neighbor. And this is in Chagsha, a small provincial city of seven million people. Most visitors to Beijing won't see this since they don't tend to get out to the distant suburbs where this is happening. In the smaller cities it is everywhere. 

I asked why there was so much building going on and was told that the government, which controls all the land, is addicted to the revenue it gets selling it to developers and the subsequent stream of development charges that are used to build the roads and the infrastructure that services it all.

The Chinese have done an astonishing job of building infrastructure and housing at a scale and pace that has never been seen in history. I could go on for pages about how the pattern of development is the very worst that they could have chosen, with pedestrian-unfriendly car-oriented development, everything too far apart for anyone to walk or bicycle (and nobody seems to), a Houston of sixty story buildings. But that isn't the biggest problem.

The biggest problem is that it looks like the biggest real estate bubble ever. Will it pop? One person I talked to said that the whole country has too much invested in the real estate to let it burst, that it is way too big to fail.
I hope he is right, but there is just so much of this stuff everywhere, former villages without even identifiable names now covered in towers. There are so many empty roads, recycling boxes at the ready, with nobody to use them until the towers pop up.
The most disturbing thing I heard was that even though prices keep going up, nobody is interested in buying a used apartment, everyone wants new construction. Older apartments are almost unsaleable and can only be rented out, at price-to-rent ratios that are ridiculously high. If this is true then is no liquidity, no real value as an investment.
It's definitely a bubble and when it pops it is going to be very messy.

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