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Why 50 Million Chinese Homes are Empty

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Dec 14, 2018

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Why 50 Million Chinese Homes are Empty
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  • This video is sponsored by Skillshare.
  • The first 500 people to use the link in the description get their first two months free.
  • Deep, in the mountains of Austria, lies the small, but scenic town of Hallstatt.
  • But this isn’t that, It’s an exact replica, built 9,000 kilometers away, near Hong Kong.
  • Austria.
  • China.
  • It’s home to European architecture, Chinese cuisine, and all the traffic of…
  • North Korea.
  • Because, during the day, it may be the wedding photo capital of the region,
  • But after the sun sets, its cottages become remarkably quiet.
  • China’s lookalike towns, of places like Paris, Berlin, London, and Jackson Hole, Wyoming,
  • aren’t alone.
  • In many places, across China, there are far more houses than there are people.
  • Long rows of apartments, even entire cities, sit completely, or mostly empty.
  • In total, approximately 50 million units, Or 22% of China’s entire urban housing.
  • But this doesn’t mean they aren’t being bought.
  • Because, they are.
  • Like crazy.
  • Ten years ago, most people were, as you’d expect, buying homes for the first time.
  • Today, it looks like this.
  • Second homes are the majority, and people are buying almost as many third homes as first!
  • These aren’t cheap, either.
  • In Los Angeles, the price per square foot is $633.
  • In Shenzhen, 805.
  • And, close your eyes, because you don’t even wanna know the price in Hong Kong.
  • Now consider the difference in wages.
  • The average annual income in Shenzhen is around 7,500 US Dollars, compared to 60 thousand
  • in LA.
  • Something clearly doesn’t add up.
  • People in China are buying homes like Americans buy… cars, But they’re leaving them empty,
  • And it’s not clear where the money is coming from, or why they’re being built.
  • The usual explanation is that China’s government is so desperate for economic growth that it
  • builds bridges to nowhere and houses to… look at.
  • But that’s only one part of a much bigger story.
  • China’s troubles begin with its political system.
  • The Central Government is the highest level of its only party.
  • Here, laws are written and the fate of the nation, decided.
  • Beijing is THE ultimate authority.
  • It appoints everyone from secretaries to governors, and isn’t afraid to move them around should
  • any one official gain too much influence.
  • BUT - it would also be a mistake to see China as one, singular power.
  • Because below the central government is a network of local divisions: 22 regional provinces,
  • 4 municipalities, 4 autonomous regions, and 2 Special Administrative.
  • Under those are over 300 prefectures.
  • Followed by the less important counties, townships, and villages.
  • Now, just as Californians have different concerns than do Texans or Floridians,
  • China is a big country, and the interests of a coastal exporter like Shenzhen are very
  • different than those of, say, a more independent region like Inner Mongolia.
  • The same is true for different levels of government.
  • While Beijing writes the rules, cities apply and enforce them.
  • Often, very differently.
  • And there’s one, awkward little detail: Cities receive just 40% of tax revenue, but
  • are responsible for 80% of their expenses.
  • So, naturally, they need another source of income.
  • And this is where things get interesting.
  • In China, rural land is collectively owned.
  • Everyone, and also no-one, owns it, which means it can’t be the location of a new
  • luxury apartment.
  • But luckily for cities, they have the power to rezone land from rural to urban, which
  • can be developed.
  • In other words, they own a money printing machine.
  • Watch this: First, a city buys cheap, rural land, Which it then redefines as urban, And
  • finally, sells to developers at its now, much higher, price.
  • Like.
  • Magic.
  • Over, and over, and over, again.
  • Cities get much-needed cash, and developers build housing like it’s nobody’s business.
  • Now, unlike states in America, local governments here are generally forbidden from taking loans.
  • But, again, there’s a loophole.
  • Cities can create a Local Government Financial Vehicle, which is a fancy way of saying, a
  • state-owned company.
  • And by “giving” it that new urban land, the “company” can do what the city legally
  • can’t: borrow money.
  • Which, they can use to build roads, schools, and, on occasion, replica Austrian towns.
  • This is so effective that, in some years, land sales account for 40% of local government
  • revenue.
  • Plus, all this construction increases GDP, which just so happens to be the way officials
  • get promoted.
  • It’s a perfect system.
  • At least, until it’s not.
  • If, or, when, housing prices fall, so does city revenue.
  • And, all those loans probably won’t magically disappear.
  • Beijing wants to avoid a housing crisis, but cities just want to survive, and governors,
  • get promoted, which puts the two at odds.
  • Eventually, cities start running out of land to sell, and have no choice but to build more.
  • Like this one, which spent 2 billion dollars blowing up the tops of mountains.
  • Those developers who purchase that land, by the way, are required to use it, which leads
  • to many, often quickly-constructed, low-quality, houses.
  • And that brings us to the second question: why are people buying them?
  • And doing it like their life depended on it?
  • Well, for one, because it kinda does.
  • Thanks to the famous One Child Policy, China now has the entire population of Canada more
  • men than women.
  • And that means fierce competition for marriage.
  • Men are expected to own at least one property before even being considered.
  • It’s one of the most important elements of social status.
  • For many, real estate isn’t just an opportunity, it’s a downright social necessity.
  • Because of this, friends and family pool money together to help buy homes for their children.
  • And that’s how, nearly everyone, in a country with the per capita GDP of the Dominican Republic,
  • can afford some of the most expensive homes on the planet.
  • The other big factor is that Chinese citizens Save.
  • Like.
  • Crazy.
  • When it comes to saving money, there’s China, and then there’s basically everyone else.
  • Where, Europeans put 4 percent of their disposable income in the piggy bank, Chinese drop nearly
  • 40!
  • The problem is, where can they put it?.
  • China’s domestic stock market is just too risky, And its banks are often seen as unpredictable.
  • Which makes real estate a Chinese investor’s best friend.
  • It alone accounts for 70% of all household wealth.
  • It also doesn’t hurt that property tax is a beautiful 0%.
  • When taxes are only paid upfront, why wouldn’t you buy as soon as possible, and just sit
  • on it?
  • Put all this together, and you have a recipe for extreme house buying.
  • An amazing 90% of homes are owned by their residents.
  • Europe and the U.S., stand at 69 and 64%, respectively.
  • And while we’re on the subject of crazy high numbers, Ninety-four percent of Chinese
  • millennials who don’t already own, plan on buying in the next five years.
  • What else do 94% of people agree on?
  • Not even China can quench this thirst for real estate.
  • Despite laws against it, billions of dollars flow out of the country every year into foreign
  • property.
  • It’s so common in places like Vancouver, that, earlier this year, it introduced a 20%
  • tax for foreigners.
  • The irony is that while cities like Beijing and Hong Kong have so little room, people
  • are forced to sleep underground, these 50 million homes can’t find renters.
  • So, hey, if you live in California, I think I may have found an escape plan.
  • Anyway, not only are these homes bought without interiors, literally just concrete walls,
  • but they’re also usually located outside city centers, where there aren’t as many
  • jobs.
  • Now, the assumption in all of this, is that, eventually, people will come, And speculation
  • will become reality.
  • The Eastern side of Shanghai, for example, was once laughed at by Milton Friedman for
  • being totally empty.
  • Today, as a financial capital of the world, with a GDP of 400 billion, we can pretty safely
  • say it’s proven the haters wrong.
  • China is in the process of migrating 300 million people from country to city, And, of course,
  • they’ll need a place to live.
  • Inevitably, many of these cities will spring to life.
  • That doesn’t mean everything is peachy.
  • A few things are decidedly not peachy.
  • First, remember that the vast majority of empty homes is expensive, commodity housing.
  • These are not the kinds of places you buy coming from a farm in the country.
  • And second, all these homes have an expiration date.
  • In China, a building can be owned, but the land beneath it can only ever be leased - from
  • the government, for 70 years.
  • After that, it’s anyone’s guess whether ownership will be renewed.
  • And if so, for how much.
  • But, the truth is, 70 years is pretty optimistic…
  • Think about it this way: If construction is good for GDP, why build once, when you can
  • build and re-build every few years?
  • It’s kinda like the iPhone, if you’d like to upgrade every year, Apple will happily
  • sell you a new phone.
  • It’s certainly not judging.
  • Except, in the case of China’s housing, developers are incentivized to make short-term
  • bets, they know their homes will only last a few decades anyway, which means using lower
  • quality materials.
  • Meanwhile, cities continue taking loans and housing prices continue rising unsustainably.
  • Of course, Beijing knows all this.
  • It’s aware of the bubble, the risks involved, and it knows more or less how to fix it - some
  • combination of slowing down lending, reining-in local governments, and introducing a property
  • tax, like Shanghai.
  • The problem is, real estate is so intertwined with its GDP, that any of these solutions
  • would seriously risk slowing down its economy.
  • In the coming decades, the world will watch as China does its best to carefully balance
  • its enormous challenges with its relentless desire to grow its economy and realize The
  • Chinese Dream.
  • As Beijing prepares for economic change by diversifying its revenue, You and I should
  • do the same.
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China’s housing bubble has left 50 million homes empty and put its government between a rock and a hard place.

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