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Yi Xianrong, an economist at the Chinese Academy of Social Sciences, noted that estimates from electricity meter readings show that 64.5 million apartments and houses stand empty in China’s urban areas, many of them bought by people counting on a constantly rising property market.
There are an estimated 622 million people living within China's urban areas. If Yi Xianrong is right, then the percentage of vacant apartments and houses within their urban areas to the population of their urban areas is therefore a whopping 10.4%.
You have to admit that it is a fairly amazing statistic, especially considering that the son of "legendary" Ken Fisher thinks China's real estate bubble is a myth. (Think of the quotes around legendary as bonus sarcasm.)
Here's a look at the percentage of vacant homes compared to the population in the United States.
The chart clearly shows that China is yet again beating us at something. They are cranking out empty homes far faster than we are. It's an economic miracle! There's just no debating that. Well, there's just no debating that without using sarcasm anyway.
Detroit gets growing
Strolling around his inner-city Detroit neighbourhood, Mark Covington pauses to take in the view. The houses and shops that existed when he was a child are gone, replaced by empty lots, the buildings either burned down or demolished. In their place is wilderness. Tall grass, wild flowers and trees. "Just look at that," he says. "It could be a country road."
Such views are increasingly common all over Detroit, the forlorn former capital of America's car industry and now a by-word for calamitous urban decline. Once the fourth largest city in America, its population has shrunk from about 1.8 million at its peak in the 1950s to fewer than 900,000 now. Its streets are lined with an incredible 33,000 empty lots and vacant houses. City government is broke. The shells of dilapidated factories look out over an urban landscape that has been likened to New Orleans after Hurricane Katrina – except Detroit's disaster was man-made and took decades to unfold.
You will note that the "incredible 33,000 empty lots and vacant houses" compared to Detroit's population is actually quite small. It's only about 3.7%. Detroit has been proactive at containing the damage clearly. Or should I say demolishing the damage?
Detroit stuck with bill for razing homes
Detroit is finding it easier to tear down homes than to make property owners pay for the demolition.
The city has sent invoices totaling more than $2.2 million to owners of abandoned homes razed as part of Mayor Dave Bing's massive demolition project.
The total collected so far: $13,024.
Way to go Detroit! That $13,024 goes a long ways in this new deflationary economy. We should not forget that it is worth at least 13,000 hours of moderately priced Chinese factory labor. Perhaps even more once China's high flying housing engine crashes and burns just like ours did. Who knows?
Source Data:
Census: Housing Vacancies
St. Louis Fed: Population
30 comments:
There are no property taxes in China so parking real estate investment actually makes some sense.
Demographically, there will always be centrifugal crush population pressures into the cities, even with the number of young adults falling by ~10% every 5 years going forward from here.
As urban wages rise and the yuan strengthens I think these real estate investments will pan out in China.
But I could be wrong, closest I've been is Seoul for a night.
It's hard trying to understand such a foreign and overcrowded society. I thought Tokyo was crowded, but they don't have anything on China.
Troy,
"As urban wages rise and the yuan strengthens I think these real estate investments will pan out in China."
For what it is worth, I strongly disagree. If the price paid for a widget greatly exceeds the price to create a widget then a nearly infinite supply of widgets will be created. That's just supply and demand. At some point the boom becomes a bust though.
The widgets in this case are expensive Chinese homes and offices built in tall Chinese skyscrapers created with cheap Chinese labor. It will end in tears, just as it did for our 1920s skyscraper era.
Further, these homes are astronomically expensive compared to the average Chinese wages.
"It's hard trying to understand such a foreign and overcrowded society. I thought Tokyo was crowded, but they don't have anything on China."
China is a huge country. Its population density is actually much lower than Japan. It's not like China should be running out of land.
Population Density
I still can't get over the fact that the Silverdome sold for a little under 600k, yikes.
"In the past few years, the city has passed on bids of $22 million, $18 million and — more recently — $17 million to purchase the Silverdome."
D'oh!
http://tinyurl.com/yhtfmbd
watchtower,
It certainly makes it hard to determine the real value of one's home, doesn't it?
"It certainly makes it hard to determine the real value of one's home, doesn't it?"
I hear that.
> Its population density is actually much lower than Japan
Vast stretches of China is totally crap land not suitable for even goats.
My parallel with Japan is thinking what happened to the country when the yen went from 360 to 120. Big property boom. (then bust)
The yuan going from 7 to 5 will be a first step. This will counter wage inflation but also bring more wealth into China as their buying power grows.
The cities in China are for the winners. It's a centripetal thing.
Troy,
80% of Japan is filled with mountains.
http://www.koreanhistoryproject.org/Jta/Jp/JpGEO1.htm
We clearly have wildly different opinions on the Chinese real estate and economic miracle story. I'm with Chanos. I don't think anything can stop the bust at this point.
I'm also in Xie's camp.
http://www.reuters.com/article/idUSTRE65G0C520100617
China's #1 goal is to keep its 1.3 billion people from losing jobs. I do not expect them to revalue the yuan in any meaningful way. Could be wrong of course.
That said, I do not think I'm wrong about Chinese real estate though. I expect an implosion. They waited too long before dealing with it. Way too long.
Here's Andy Xie's take.
http://english.caing.com/2010-04-12/100134074.html
Hype over an 'imminent' increase in yuan value ignores China's greater need for higher interest rates and fewer bubbles
Unless China exits its economic stimulus quickly, the nation's inflation rate could rise to double digit levels sooner than many expect. The right sequence of events for a proper response to inflation would be to raise interest rates and then, if necessary, move the yuan exchange rate. But acting on the currency first, especially in small steps, would further inflate China's property bubble and inflation, potentially leading to a major economic crisis in two years. A small increase in the yuan's value would fail to resolve two pressing problems: inflationary pressure at home, and political pressure from the United States. Moreover, a small appreciation would attract hot money, stoking inflationary pressure.
One more quote from that last link...
By all measures (stock value to GDP ratios, inventory value to GDP ratios, new property sales to GDP ratios, price to income ratios, rental yields, and vacancy rates) China's property market is one of the biggest bubbles ever. It's probably much bigger than the U.S. property bubble relative to GDP.
I am a believer in the theory.
Stag,
There is no question in my mind that China has a massive property (and hence debt) bubble.
The response to the inevitable bursting of the bubble(s) is what interests me.
Most seem to assume the Chinese Government's response will be inflationary. It's certainly a possibility. But what happens if China embraces deflation? I think it's in China's long term interests to allow a deflation. A deflation in CHina would upset the current world order in a big way. It would be a cat 11 storm for the Fed too.
Stag,
There is no question in my mind that China has a massive property (and hence debt) bubble.
The response to the inevitable bursting of the bubble(s) is what interests me.
Most seem to assume the Chinese Government's response will be inflationary. It's certainly a possibility. But what happens if China embraces deflation? I think it's in China's long term interests to allow a deflation. A deflation in CHina would upset the current world order in a big way. It would be a cat 11 storm for the Fed too.
Troy, Mark,
Mark I thought you were wrong (for once...). but you are correct about the Chinese cities being more dense:
http://www.citymayors.com/statistics/largest-cities-density-125.html
I think that the key here (and we are all on the same page) is that the bubble is concentrated in the metropolitan areas.
I think that the decline in commodities will be tied to the R/E bubble deflation in china (and canada).
my 2 cents,
remy
My general view is that bubbles from a lower basis are different.
Yes, the factory wage is $300/mo. But young people are going to fall by 30% this next decade, putting pressure on wages.
There is immense demand for land and housing in Chinese cities.
Same thing in Tokyo, too. Land there is still ridiculously expensive. It's only in the marginal areas where land prices truly collapsed.
It wouldn't surprise me if Chinese land bubble will collapse horribly, or if their economy matures to support these prices through lower interest rates, higher wages, and greater demand for the urban life. It is a complicated picture.
Part of the price rise in Japan was suburban land moving from cabbage to condos and urban land moving from 3 story buildings to 8 story buildings -- the ability to increase density naturally boosts site values.
AKAIK, Tokyo land was CHEAP in the 1970s, its massive run up in the 80s was an overreach but lots out in the sticks still run $300,000 or so. SFH lots inside the Yamanote are 10X that.
mab, remy, and Troy,
Skyscrapers and Business Cycles
The world's tallest buildings are generally built when there is a substantial and sustained divergence between the actual interest rate and the natural rate of interest, where the actual rate is below the natural rate as a result of government intervention.
I believe it.
World's Tallest Buildings
The Chrysler building was completed in 1930. The Empire State building was completed in 1931. Hello financial crisis.
The World Trade Center was completed in 1972/1973. The Sears Tower (Willis Tower) was completed in 1974. Hello financial crisis.
5 of the top 10 are now located in China and Hong Kong. All were built recently. Coming it at #3 is the Shanghai World Financial Center in 2008. Awesome timing!
The tallest structure is the Burj Khalifa built in Dubai in 2010. Awesome timing!
Inflation and inflationary thinking created the skyscrapers in my opinion. It's already happened. Deflation may come next.
Bubble, Bubble, China's in Trouble
The rental market in Beijing, in comparison to the red-hot real estate market, is fairly weak, and besides, renting out those apartments -- putting them to use and risking some wear and tear -- could diminish their value. So they remain pristine and empty.
The price to rent ratio is clearly well into uncharted territory.
Blogger was having problems with my long comment and said it could not process it. I kept trimming it and reposting it. Once it was accepted, I saw that all three were posted anyway. Go figure.
This behavior is expected. Land is the mother of all monopolies, as Winston Churchill speechified 102 years ago when he was stumping for the land value tax.
China has no property taxes, which make land a magnet for speculators.
China's gone from dirt poor in 1985 to the world's second economy 25 years later. I think it can continue this trajectory for the next 25 years and become the #1 economy with 400 million or so middle class people.
Inflation is the name of the game there. They're still coming from a very low basis, 10X inflation will just put them 50% below the wage level of Japan and the US.
Again, this is not to say that I know what I'm talking about about China in particular. I don't.
One more thought.
We're continually told how undervalued the yuan is.
I really don't have all that much of an opinion on it. I can say that the propaganda machines are running 24/7 though. We're told a great many things over and over again that haven't exactly been true in hindsight. The biggest ones being that the euro was a safe haven, that real estate prices only go up, that deficits don't matter, and that stocks will outperform all other investments over the long-term.
The China story has never been about currency manipulation to me. It's been about very poor people willing to do our work far more cheaply than we will. The currency is just a very distant side topic. In my opinion, it is a smoke screen so that we can blame China for taking American jobs instead of blaming ourselves.
Troy,
China's gone from dirt poor in 1985 to the world's second economy 25 years later. I think it can continue this trajectory for the next 25 years and become the #1 economy with 400 million or so middle class people.
And that is why we differ. I do not believe in the Chinese economic miracle story. I do not believe that the trajectory that has been in place for the past 25 years is even remotely sustainable. I would not predict 400 middle class Chinese. I might predict fully automated factories at some point though. What would China's middle class do then?
The Pipe Dreams of Exponential Growth
Seasonally Adjusted Port Traffic (Musical Tribute)
Exponential Growth and Immortality!
It's too easy to extrapolate the past and project it into the future.
China's property demand hides a dark reality
Chinese investors have few appealing options. Capital controls prevent citizens from investing overseas; bank deposits yield 2.25 per cent, less than the 3.1 per cent rise in May's consumer price inflation.
A healthy economy should not need negative real interest rates in order to function.
Few places illustrate the boom in wealth and lack of investment opportunities better than Ordos, population 1.5 million.
The world is running out of investment ideas.
"Ordos has basically been bought up by miners who have got plenty of cash," said Hurun's Hoogewerf. "They're buying up the properties ... and basically just sitting on them."
A nearly infinite supply of properties can be created when they can be stacked in the form of skyscrapers. At some point there are way too many of them though.
The nation's 13.6 trillion yuan of new loans in the past 17 months, bigger than the economies of South Korea, Taiwan and Hong Kong combined, is "unprecedented in 400 years of economic history," said London-based hedge fund manager Hugh Hendry, co-founder of Eclectica Asset Management.
How can they possibly continue to grow exponentially from that level?
The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. - Alan Greenspan, 1966
They may think that buying properties is safe but I would argue otherwise. Sometimes it is better to just lose a percent per year conservatively than to swing for the fences. This may be one of those times.
Some points on Chinese real-estate:
1) There is some subset of housing that is simply unacceptable as it ages to a population growing richer. I mean, there are shoddily built hovels that are empty because everyone moved to more modern buildings. Not sure if that would be a counter-weight to the other outliers of the luxury villas.
2) There is also homes by absentee owners who have moved to the big city - something that happens far less in the USA.
Cobacoba98
Mark,
I was starting to worry you were overcome by allergies and could no longer post!
Ever tried Astelin Spray? I forgot about that one but it works very well.
But in general I agree that there is too much money chasing too few investments...and too many Chinese think adding extra empty houses with their profits is a good idea.
cobacoba98
Mark, I understand you are protecting your nest egg and I do think you are doing the right thing w tips... for those who seek a little growth, and without discussing particular stocks, anyone invest in income/muni funds?
Cobacoba98,
It will certainly be interesting to see just how many more empty homes China can create before things really start to unravel.
GYSC,
I have passed the worst part of the allergy season I think. It tends to hit me all at once as the heat cranks up. Today is rather cool and mild though. :)
remy,
Here's a glimmer of hopelessness.
U.S. Banks Risk ‘Untold Problem’ as Muni Debt Swells
July 6 (Bloomberg) -- Citigroup Inc., State Street Corp. and U.S. Bancorp are among U.S. banks whose municipal bond holdings have reached a 25-year high just as state budget deficits swell to $140 billion, the most since the start of the recession.
...
“It’s a market where it’s clear that the underlying fundamentals are lousy,” said Michael Aronstein, chief investment strategist at Oscar Gruss & Son Inc., a New York- based brokerage. “People can say fundamentals don’t matter but I’ve been doing this for 32 years. They do.”
I'm always going to lean towards being a scaredy cat though. As you say, I value safety more than most would (or maybe even should). As it relates to my own personal finances, I'm still a firm believer in "if one must panic, at least panic first".
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