China's Ghost Cities



  • Video.

    Basically, they're building something like 10 large cities (i.e., for millions of residents) per year, but they're mostly vacant. Towards the end of the video (~13m) they mention that typical terms are 50% down, balance paid off in 3 years. Of course, way out of the price range of most Chinese.

    This real estate bubble, plus their looming demographics will be...interestingscary.



  • Booo, I was expecting real ghost.  I think it will be scary for everybody, play HomeFront and replace Korea with China



  • Scary, but also a great opportunity for foreign investors, if they allow those kinds of things...



  • @boomzilla said:

    Video.

    Basically, they're building something like 10 large cities (i.e., for millions of residents) per year, but they're mostly vacant.

    Am I the only one thinking "Laser Tag, but with bazookas?"



  • No, no you are not.



  • I visited China a couple years ago and I saw these on the outskirts of Beijing. (The guy we were staying with bought a few of these houses as investments) It was like an entire suburban town, completely empty except for security at the gate (yes the whole thing was gated) and stationed throughout. Most of the houses didn't even have drywall or flooring.



  • @tOmcOlins said:

    The guy we were staying with bought a few of these houses as investments.

    I really can't understand the attraction of even investing in these things. The video showed a couple who had jobs in Beijing at a salon or something, and made about $900 between the two of them, currently renting a single room for a quarter of that. I'm not sure how they stack up vs others, but you can't make money off of a $100K condo with renters paying $200 per month. Of course, their place will soon be demolished for some new development.

    I guess if you can cram four times that into the condo (like the two bedroom place being shared by 9 people), you could get something like $1,000 per month, which is more reasonable as far as a monthly rent (at least, if you've got a $100K condo, but definitely not for the $300K condos). I imagine having 9 people there puts a lot more wear and tear than 3 or 4. They'd probably be better off just hiring the construction crews to dig ditches and fill them back in.

    Maybe we can send Tom Friedman to live there. At least for a day.



  • @Xyro said:

    Scary, but also a great opportunity for foreign investors, if they allow those kinds of things...
    How is this an "opportunity" for inverstors?  Let's say I buy a couple of these $300k condos.  Then what?  I can't sell or rent them to anyone because the vast majority of the population can't afford them.  That's why they are empty in the first place.   The only other option would be to sell or rent them to people from other countries who are looking for a vacation home in China, which seems like it would be a pretty small market.



  • I got to the bit where the 'expert' claimed that the pyramids were just a boondoggle and gave up. They're clearly making the case they want to make, and ignoring facts which conflict with it.

    I don't know about the prices, but the oversupply is a complete nonsense. It's worth noting that this 'empty' city was actually a third full. That's pretty healthy for such a new city. Milton Keynes took a lot longer to get off the ground. I remember visiting there about 15 years ago, and the place was still half empty. The last few tens of percent take much less time to fill up than the first few, for obvious reasons.

    Mostly, though, it's about perspective. China is vast. 60-odd million empty flats would be a disaster in the UK, but in China is barely sufficient provision for a handful of years' population growth. China still has a largely rural, agricultural population, and they're quite rightly expecting that to change. Developed nations have at least 80:20 urban to rural population distribution. China is at around 40% urban, but expects to get to over 60% within a couple of decades - that's 250 million people moving to cities. On top of that, add another couple of hundred million in population increase.



  • @boomzilla said:

    I really can't understand the attraction of even investing in these things. The video showed a couple who had jobs in Beijing at a salon or something, and made about $900 between the two of them, currently renting a single room for a quarter of that. I'm not sure how they stack up vs others, but you can't make money off of a $100K condo with renters paying $200 per month.
    You can't make money now, but what about the capital growth? China expects that couples' income to nearly dectuple in real terms over the next twenty years. At that point you might be owning a property worth several times what you paid for it. Say they end up being able to pay nearer 2k per month rent - averaged over twenty years, assuming smoothish growth, you'll get the 1k rent you're after as well.

    Sounds to me like they're a bit overpriced perhaps, and definitely a pretty speculative investment, but the potential upside is huge.



  • @intertravel said:

    You can't make money now, but what about the capital growth? China expects that couples' income to nearly dectuple in real terms over the next twenty years. At that point you might be owning a property worth several times what you paid for it. Say they end up being able to pay nearer 2k per month rent - averaged over twenty years, assuming smoothish growth, you'll get the 1k rent you're after as well.

    Sounds to me like they're a bit overpriced perhaps, and definitely a pretty speculative investment, but the potential upside is huge.

    I guess it depends on how long you can have your capital effectively sitting idle as your property deteriorates. Anyone who buys now will be really screwed when the bubble pops. I can't see much upside in that currently, especially since the financing is so strict.

    They didn't really go into how the construction was being financed. But with so much vacancy, it can't have been a good investment, either way. Reminds me of the mobo / barrel of money discussion on the other thread.

    I've seen stories about how Chinese are buying up US real estate. Perhaps they'll avoid a similar fate as the Japanese, given that they're buying after our bubble popped.



  • @boomzilla said:

    I guess it depends on how long you can have your capital effectively sitting idle as your property deteriorates. Anyone who buys now will be really screwed when the bubble pops. I can't see much upside in that currently, especially since the financing is so strict.
    You're assuming there is a bubble, for a start. Even if there is, it's only because the prices are too high for now - they might dip dramatically, which would be a better time to buy, but if you're looking to hold long-term, there is sufficient upside that you can make a profit even at these prices. I wouldn't rely too much on the pricing data they gave in the video - there might well be significant early-bird discounts available.

    @boomzilla said:

    They didn't really go into how the construction was being financed. But with so much vacancy, it can't have been a good investment, either way.
    I understood they're being built by the state - so finance is not an issue. The vacancy is pretty much to be expected, to start with. Come back in ten years and see what it's like :)

    @boomzilla said:

    I've seen stories about how Chinese are buying up US real estate. Perhaps they'll avoid a similar fate as the Japanese, given that they're buying after our bubble popped.
    The Chinese have to buy real assets with all the dollars they have before the currency inflates too much. They expect to lose a bit on the deal, but not as much as once the US inflates away their debt.



  • @intertravel said:

    You're assuming there is a bubble, for a start. Even if there is, it's only because the prices are too high for now - they might dip dramatically, which would be a better time to buy, but if you're looking to hold long-term, there is sufficient upside that you can make a profit even at these prices. I wouldn't rely too much on the pricing data they gave in the video - there might well be significant early-bird discounts available.

    I'm assuming the prices are somehow related to the costs to build. Yeah, they've got a lot of people. But...10 cities per year, sitting empty! The one they were looking at was meant for something like 12 million people. So they've got tens to hundreds of millions of people to move into these things. Seems like it might go better to have some more intermediate steps from peasant / sweatshop laborer to modern urbanite, but what do I know...I'm not a central planner. How long can you throw money down this hole without going broke?

    @intertravel said:

    I understood they're being built by the state - so finance is not an issue. The vacancy is pretty much to be expected, to start with. Come back in ten years and see what it's like :)

    The State still has to get the money somewhere. I assumed there was some state aspect here, since it seems hard to tell where the state begins and the private company begins, in some cases. The state can't magically will resources into being. They can print money, sure, but that's a losing proposition in the long run. And any resources invested here, now, are resources not invested in something productive. Maybe they'll be runaway successes once the economy and demographics catch up. But that seems like a big if to me.

    You still have to maintain the infrastructure, or 10 years from now a lot of it won't be habitable, period. There's more money flushed down the toilet. My Chinese geography is pretty sketchy, but a key seems to be having places for people to work, i..e, industry. The report didn't really look at that, but maybe there's a big effort to get companies to locate there. Though it might be difficult to get new investments with the economy everywhere else.

    @intertravel said:
    The Chinese have to buy real assets with all the dollars they have before the currency inflates too much. They expect to lose a bit on the deal, but not as much as once the US inflates away their debt.
    Yeah, they've got nearly a trillion in US debt already that they're going to lose when it happens, so maybe the real estate is a reasonable hedge. The coming inflation (after the politicians reject any way to reverse course, of course) is a bigger WTF than almost anything China is doing, anyways (except for maybe killing people or stuffing them in the laogai). I'm amazed that they (and everyone else) have bought so much US debt at such low rates.


  • @boomzilla said:

    The State still has to get the money somewhere. I assumed there was some state aspect here, since it seems hard to tell where the state begins and the private company begins, in some cases.
    Yeah, I don't know for sure. I just assumed it comes from the same place as all of China's other vast infrastructure projects do.

    @boomzilla said:

    You still have to maintain the infrastructure, or 10 years from now a lot of it won't be habitable, period. There's more money flushed down the toilet. My Chinese geography is pretty sketchy, but a key seems to be having places for people to work, i..e, industry. The report didn't really look at that, but maybe there's a big effort to get companies to locate there. Though it might be difficult to get new investments with the economy everywhere else.

    I got the impression we weren't quite getting the whole story. The cities aren't completely empty for starters. Then again, with that empty mall they showed, perhaps there's a smaller mall across town that's busy - if I were doing this kind of thing, I'd try and fill the small mall first, and then offer incentives for the whole lot to move over to the big mall together. The thing with building new cities, though, is that the cities' economies come together slowly to start with. Getting a couple of big factories is just a starting point - half the city's economy will be support structures like hospitals, schools, shops, restaurants, and so-on. It all takes a few years, though.

    Of course, none of this makes the property a good investment for private investors - but the cities themselves are quite possibly not a WTF at all.

    @boomzilla said:

    The coming inflation (after the politicians reject any way to reverse course, of course) is a bigger WTF than almost anything China is doing, anyways (except for maybe killing people or stuffing them in the laogai). I'm amazed that they (and everyone else) have bought so much US debt at such low rates.

    Not sure they have much choice. On average, they'll get a decent price for the stuff they sold us. Half the debt will be inflated away, but a decent chunk of the remainder will have been used to purchase real assets before that happens. Also, there's no way the US politicians could pursue a non-inflationary policy even if they wanted to - the only way out of too much debt is to inflate. It's tried and tested, and it's what most troubled Western economies are now doing. The UK seems to be managing quite nicely - 4-5% is perfect. In ten years, debt is cut to manageable levels.



  •  ...reminds me of my first "glorious" building projects in Dwarf Fortress

     

    (make them rentable urban training areas for foreign armies! what could possibly be better training for bomber pilots/artillery squads, or just about anyone? then, rent them to hollywood movie makers. I am Legend had computer-made derelict New York, but now we can do it for real! And then they can rebuild it again, everybody's win.)



  • Even if there is no immediate demand for housing of that cost, it's hard to imagine the properties will stay empty for very long... They're just waiting for the network effect to catch up. Further, skyscrapers and megamalls like that are awesome population sinks. Overpopulation becomes much less of a problem when you're thinking vertically.



  • @intertravel said:

    Not sure they have much choice. On average, they'll get a decent price for the stuff they sold us. Half the debt will be inflated away, but a decent chunk of the remainder will have been used to purchase real assets before that happens. Also, there's no way the US politicians could pursue a non-inflationary policy even if they wanted to - the only way out of too much debt is to inflate. It's tried and tested, and it's what most troubled Western economies are now doing. The UK seems to be managing quite nicely - 4-5% is perfect. In ten years, debt is cut to manageable levels.

     

     

    Ooooh boy... There is so much bad economic theory here, I don't know where to begin.  It is actually impossible to inflate out of debt while running a deficit, as inflation increases the cost of rolling new debt faster than the old debt is "inflated away."  Attempting to inflate away debt is tantamount to default, and the consequences are similar.  Might as well not inflate, default on external debt, and have the foreign bondholders take a haircut instead of anybody who owns USD, but that would attract way too much attention.  People simply don't notice the default if it is done through inflation.

    Also, the Chinese government might be OK building the empty cities, but that does not mean they are not a terrible investment.  From an individual investor's perspective, even if you assume the value of those things might go up, as Keynes said, a market can stay irrational longer than you can stay solvent... And that says nothing of opportunity cost.  As far as the government is concerned, it is still a bad investment, because they could be spending money on things like educating their people--things that will have a greater long term return when it comes to their competitiveness in the world--instead of building cities for which there is very minimal demand.  Remember, regardless of what the National Association of Realtors would have you believe, structures are a depreciating asset.  If you don't keep dumping more money into it in perpetuity, the value will approach zero.



  • @ShatteredArm said:

    It is actually impossible to inflate out of debt while running a deficit, as inflation increases the cost of rolling new debt faster than the old debt is "inflated away." 

    Eh? Empiricism shows your theory to be flawed. So does common sense, of course, and basic arithmetic. If you have fixed-rate debt, and you inflate, the amount owing decreases in real terms.

    @ShatteredArm said:

    Attempting to inflate away debt is tantamount to default

    You're a funny man.

    @ShatteredArm said:

    Remember, regardless of what the National Association of Realtors would have you believe, structures are a depreciating asset.  If you don't keep dumping more money into it in perpetuity, the value will approach zero.

    Agricultural land is generally worth less than urban land. So much less that the value of the structure is almost irrelevant, in some places. Build a new city, and the increase in the value of the land will be the important part. These buildings aren't empty long-term, so the cost of upkeep is not that high.

    @ShatteredArm said:

    opportunity cost

    Which part of urbanization being a necessity for growth did you fail to understand?



  • @intertravel said:

    @ShatteredArm said:
    It is actually impossible to inflate out of debt while running a deficit, as inflation increases the cost of rolling new debt faster than the old debt is "inflated away." 

    Eh? Empiricism shows your theory to be flawed. So does common sense, of course, and basic arithmetic. If you have fixed-rate debt, and you inflate, the amount owing decreases in real terms.

    Now you're getting silly. How does that possibly apply to sovereign US debt? There's nothing fixed rate about it. We're not talking about a mortgage or something. Lots of that debt has to roll over all the time. It's very rare that anything is actually retired.

    @intertravel said:

    These buildings aren't empty long-term, so the cost of upkeep is not that high.

    The Chinese are certainly betting on that. Of course, in those parts, they can simply force people to move, but when those people still can't pay enough to earn a reasonable return, they're still screwed in the short to middle term. If they really do fill them up, then, yeah, their long term prospects may be better. But at what cost?

    @intertravel said:

    @ShatteredArm said:
    opportunity cost

    Which part of urbanization being a necessity for growth did you fail to understand?

    Ah, so they had to build those cities. And not just one or two, but tens of them. And this was the best way to get that growth?

    What part of opportunity cost don't you understand?


  • @intertravel said:

    Eh? Empiricism shows your theory to be flawed. So does common sense, of course, and basic arithmetic. If you have fixed-rate debt, and you inflate, the amount owing decreases in real terms.

    Evidently you missed the part where I qualified it with "while running a deficit."  You're assuming that there is no new debt, which will have to be issued at a far higher rate than the old debt is retired.  Additionally, the old debt has fixed maturity dates, and when those dates lapse, new debt will be issued at a higher rate.  Government debt is not like your mortgage; it's not one giant loan with a single coupon and maturity date.  Structural deficit invariably leads to default in some form or other, and what we have is a structural deficit.

    @ShatteredArm said:
    Attempting to inflate away debt is tantamount to default

    You're a funny man.

    Perhaps you should read Rogoff and Reinhardt's book "This Time Is Different."  I've only read half of it, but they describe quite clearly, with plenty of historical data, how inflation and default are not that different.

    @ShatteredArm said:
    Remember, regardless of what the National Association of Realtors would have you believe, structures are a depreciating asset.  If you don't keep dumping more money into it in perpetuity, the value will approach zero.

    Agricultural land is generally worth less than urban land. So much less that the value of the structure is almost irrelevant, in some places. Build a new city, and the increase in the value of the land will be the important part. These buildings aren't empty long-term, so the cost of upkeep is not that high.

    @ShatteredArm said:

    opportunity cost

    Which part of urbanization being a necessity for growth did you fail to understand?

    That whole "if you build it, they will come" line of reasoning confuses cause and effect.  Historically, cities have been built because there were economically viable places for people to congregate.... Places don't become economically viable simply because there was a city built there.  There are plenty of historical examples of places which made sense for cities, grew to a reasonable size, but were abandoned because the economic reason for people living there vanished.  The land doesn't maintain its value simply because there was a city there; if anything, the structures become a liability because they have to be boarded up, torn down, etc. (see: Flint, MI)  Look at any ghost town in the West for examples.

    No, the land value will not go up if there is no economic reason for people to live there.  And until wages go up to the point where there are a significant number of middle class Chinese people willing to rent for more than the monthly payment on a mortgage on one of those condos, it will be a bad investment.   That's why house prices are still declining in many parts of the US... And the US has far more potential renters than China does.



  • @ShatteredArm said:

    And the US has far more potential renters than China does.

     

     Of course, I meant "able renters.



  • @intertravel said:

    @ShatteredArm said:
    It is actually impossible to inflate out of debt while running a deficit, as inflation increases the cost of rolling new debt faster than the old debt is "inflated away." 

    Eh? Empiricism shows your theory to be flawed. So does common sense, of course, and basic arithmetic.

    Yes, this is why the Wiemar Republic, Zimbabwe, and the USSR are the three largest economies on the planet!

    And really, if anyone's a shrewd investor, it's the Communists.  I mean, like, literally every one of their investments has paid off! I mean, really, name one of their investments that hasn't. And there's literally no better idea than manufacturing quotas, I mean, it worked so well for the Soviets with nails, why not upscale it to whole cities?  Literally a catastrophe proof plan!


Log in to reply
 

Looks like your connection to What the Daily WTF? was lost, please wait while we try to reconnect.