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China’s Empty Apartments.

By Dan Harris on Posted in China Business, Recommended Reading

Just read a truly excellent two part series of posts on China’s housing market. The posts are from China Beat and they are titled China’s Empty Apartments.  Part I is called “How the real estate market got stir-fried” and part II is called “What happens when the party ends?“  They were written by freelance writer Michael Gsovski and I highly recommend them to anyone interested in China real estate.  

The posts do a great job of capturing the curiouser and curiouser surreality that is China real estate. I particularly liked this portion:

Mr. He has himself invested in an apartment in Chenggong, not in spite of this government interference, but because of it.

“The government wants to increase their revenue, so they have to make sure the price of land increases constantly,” He said. “Under these conditions everyone must choose to invest in real estate.”

This is the “stir-fried apartment,” a phrase that describes apartments bought by wealthy individuals as investments, yet left empty because nobody they know is willing to pay the high rents. Many buyers understand that the market for apartments does not conform to consumer demand, but invest anyway, for two reasons. First, they need a place to store savings outside either the sclerotic banking system, which delivers returns far below the rate of inflation, or the Chinese stock market, which is notoriously volatile.

Second, they are confident that local governments will continue to drive land prices upwards as a way to raise land lease revenues.

I just don’t know….

  • neil

    Thanks for posting this. Very interesting article. It seems like this will become a political issue in the coming years, if it isn’t already – vast complexes of empty luxury apartments, while there is a housing crisis going on, and living costs and rents are increasing. Ultimately there will be as much pressure on the government to address this problem/inequality, as there is to endlessly profit from rising land values.
    My own personal opinion is that there is no shortage of demand in China, so there are good fundamentals holding the market up. But I think you’d be insane to invest money there. The government could just decide to take the apartment off you, just like that, and no-one in China would ever give a damn about a foreign speculator.

  • Chihon Ley

    Many Chinese trust the State and the government to an end no any Western people would do, in a weird mix of naiveness and cynicism. Cultural reasons? Maybe, think in the Chinese meaning of the word “state” (pinyin: guo jia); no any Westerner thinks the state this way.
    No matter it, I think China is not near yet to a bubble burst but the monster is at the end of the lane, as always.
    Regards and thanks for the post, a very good one.

  • Whitieinozz

    I recently read where there was a survey done on (new) vacant appartments in China. 65 million are empty, this was done by electricity meter readings. Whitie

  • Hua Qiao

    Nobody can defy gravity. The question is how hard wil it fall. China has had a privatized real estate market for less than 20 years. No one has ever been through a downturn. I continue to hear people say that real estate only goes up. Scary.

  • Jeff

    Sounds like a bubble being blown up to me. But when this bubble bursts, the effects will be felt world wide.

  • Chenguang Zheng

    The land is regarded as a kind of resources of government which they can use to make great profits by selling them to people. Chinese government is very good at making money like running a corporate but do not owe any fiduciary duties.

  • http://austocks.wordpress.com Mr Editor

    Thanks for sharing. I too have written about China’s real-estate bubble. I thought it might be worth sharing here. http://wp.me/p1hMMW-kZ

  • dan berg

    Latest IMF study says: no bubble. Local bubbles, perhaps, but not nationwide.

  • http://www.pasadenacriminalattorneys.com Joe

    I saw a BBC report awhile back that talked about all these “ghost towns” in China where crazy amounts of building had occurred, but nobody lived in these cities. I had to wonder at the time where the construction workers who built these gigantic malls, universities and apartment complexes lived themselves. What kind of wages would it take in China to actually afford real estate? And what’s going to happen when this bubble bursts? Because it WILL at some point.

  • http://www.foarp.blogspot.com FOARP

    The interesting thing about this is that offficial stats show way-high levels of urban home ‘ownership’ (remembering that no-one actually can own real-estate in the PRC, but only hold a set of rights over property which does not always include the right to profit from capital gains). In fact, the latest stats show an 89% level of home-ownership – higher than in any major economy. There’s a lot reasons to be dubious about this though.
    Still, if most people live in their own property, why is there so much investment in residential properties for others to rent? Is China becoming a country of landlords without tenants?
    As for predictions of doom, yes, a crash will eventually happen, but the thing is that it would have to crash MAJORLY for people to suffer loss – we’re talking by 40-50% plus for most. I’m not saying this is impossible, but is it likely?

  • Joe2

    Yes, Real Estate in China is a particular kind of weird. Not really comparable to anywhere else due to many factors.
    There were some programs on local Beijing TV a while back where some researchers did some, well, research: they went and looked at electricity meters; camped out in front of large apartment complexes and counted the number of people coming and going; camped out overnight and counted the number of apartments that had lights that went on and those that didn’t; etc. Their conclusion is that at least in some large cities, large luxury apartment complexes are at most 50% in use.
    Whereas some locals I speak to in China think the “bubble” will never pop because there is such a strong demand.
    Well, I doubt a crash, more like a long turmoil.
    If the government every mandates a drastic change, such as a revamp of the houku 户口 system then one never knows…

  • Falen

    The key word is “saving”. These empty apartments reflects “saving” by people who have nowhere to park their money, not homes people live in and with which they borrow against to binge on big screen TVs and vacations after having already maxed out their credit card doing the same.
    It’s a matter of leverage. Is enterprises and government and people in China so highly leveraged that nobody can afford the popping of a housing bubble? How much “paper loss” can be afforded without posing systemic risk? 30%, 50% drop in value? Does the government have the capacity to respond?

  • Twofish

    FOARP: In fact, the latest stats show an 89% level of home-ownership – higher than in any major economy. There’s a lot reasons to be dubious about this though.
    There really isn’t, In the mid-1990′s, anyone who worked for a state-owned enterprise got title to their government provided apartment. This was sort of a “going away” present for ending the lifetime employment system. Given that everyone that lived in the major cities in the mid-1990′s got a free apartment, and given that the statistics likely only count properly registered residents they seem reasonable.
    FOARP: Still, if most people live in their own property, why is there so much investment in residential properties for others to rent?
    Paradoxically, there is so much investment in residential properties *because* most urban dwellers own their own apartments. You have large numbers of people that got their dwellings for free so they have no mortgage and no rent. Hence they end up with vast amounts of spare cash. This goes into investment properties for a number of reasons…..
    1) Apartments make economic sense even if you think that China is in the middle of a property bubble and the market is going to crash. If you assume that the price of an apartment will crash by 50% in the next seven years and then track inflation, you are still better off putting your money in an apartment than in savings account.
    Personally, I think it’s unreasonable to think that the government is willing or able to keep real estate prices from going up indefinitely, but I think it is also unreasonable to think that the government wouldn’t act to keep real estate prices from going to low. If the market crashed by more than 50%, then the government could stabilize prices by refusing to sell anymore land for new development.
    2) Apartments are also investment vehicles for the paranoid. If you buy a stock or bond, you really don’t know if the company that you are handing your money to is gambling it all in Macau. One reason that people like to buy apartments is that you can physically go to the apartment and see if it’s actually there. Also, land registries are pretty clear, so you can check to see easily if the person that is selling you the apartment actually can sell you the apartment, and once you are the registered owner, you don’t care what the company does with your money.
    3) An apartment even makes sense if you think that the Chinese economy is doomed. If all hell breaks loose, at least you have an empty apartment, whereas if you put your money into paper, it might all disappear. The only thing that could destroy you is if the government seized residential property, and even in that extreme case, you are likely to come out ahead. The government in the 1980′s paid compensation to landlords whose apartments got seized by Mao in the 1950′s, so if you owned an apartment in China in 1946, you still ended up better off than any other investment even *after* the Great Leap Forward and the Cultural Revolution.
    I’m also surprised that the articles didn’t seem to mention the *main* reason for the empty apartment phenomenon. The problem is that Chinese apartments are built as concrete shells. The apartment builders builds the apartment with no interior decorations (i.e. no wallpaper, no light fixtures, no toilets, nothing), and it’s assumed that the owner will make the apartment livable. The trouble is that if you are an investor that is holding the apartment for capital gain, you have no incentive to spend the money to make the apartment suitable for rental. One way that governments have been trying to create an incentive to force apartment owners to rent out the apartments has be through property taxes on investment apartments. Once you get a tax bill at the end of the year, then you are going to look for ways of getting a cash stream so that you can pay for the taxes.
    One other thing, the measures to cool the housing market are working. The major cities imposed restrictions on the sale of apartments to non-residents (and since the government has control over the land registries, it’s trivial for them to check), and apartment prices in Beijing and Shanghai have gone down by 20-30% over the last few months, but since the world didn’t end, no one noticed.
    The people that the article quoted are of the “the Chinese economy is hopelessly doomed” camp so that they tend to take any problem as evidence that the Chinese economy is hopeless which means that they aren’t that good for thinking up ways to fix the economy. But the “Chinese economy is hopelessly doomed” gets old after a while. We’ve been through several rounds of “there is this problem with the Chinese economy, and it’s doomed” whereas what has happened was “there is this problem with the Chinese economy, and people who have a strong incentive to fix the problems with the Chinese economy so that they can stay in power actually go ahead and do so” and compared to the problems that have been fixed in the past (and for that matter the problems that the US economy currently faces), the problem of empty apartments is a really, really, really easy one to fix.