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Inside China's Real Estate Bubble

Tyler Durden's picture





 

The subject of ghost cities and real estate bubbles in China is not a new one (as we have discussed here, here and here). However, as this brief but devastatingly insightful clip from CBS 60 Minutes shows, "if you go to China, it's easy to see why there's all the talk of a bubble. We discovered that the most populated nation on Earth is building houses, districts and cities with no one in them - no residents, desolate condos and vacant subdivisions uninhabited for miles, and miles, and miles, and miles of empty apartments." But... "they've all been sold" to foreign liquidity and more worryingly, to the domestic Chinese middle class who have been 'repressed' into this speculation.

 

 

Excerpts from the Transcript:

China has been nothing short of a financial miracle. In just 30 years, this state-controlled economy became the world's second largest, deftly managed by government policies and decrees.

One sector the authorities concentrated on was real estate and construction. But, as we first reported in March, that may have created the largest housing bubble in human history. If you go to China, it's easy to see why there's all the talk of a bubble. We discovered that the most populated nation on Earth is building houses, districts and cities with no one in them.

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He's showing us around the new eastern district of Zhengzhou, in one of the most populated provinces in China - not that you'd know it. We found what they call a "ghost city" of new towers with no residents, desolate condos and vacant subdivisions uninhabited for miles, and miles, and miles, and miles of empty apartments.

Lesley Stahl: Why are they empty? I've heard that they have actually been sold.

Gillem Tulloch: They've all been sold. They've all been sold.

Lesley Stahl: They've all been sold? They're owned.

Gillem Tulloch: Absolutely.

Owned by people in China's emerging middle class, who now have enough money to invest but few ways to do it. They're not allowed to invest abroad, banks offer paltry returns, and the stock market is a rollercoaster. But 15 years ago, the government changed its policy and allowed people to buy their own homes and the flood gates opened.

Gillem Tulloch: So what they do is they invest in property because property prices have always gone up by more than inflation.

Lesley Stahl: And they believe it will always go up?

Gillem Tulloch: Yeah, just like they believed in the U.S.

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Lesley Stahl: Giant cities being built with people not coming to live here.

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Gillem Tulloch: Yes. I think they're building somewhere between 12 and 24 new cities every single year.

Unlike our market driven economy, in China it's the government that has spent some $2 trillion to get these cities built - as a way of keeping the economy growing. The assumption is "if you build it, they'll come." But no one's coming.

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Lesley Stahl: And it's all Potemkin.

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Lesley Stahl: So if the bubble bursts, who's left holding the bag?

Gillem Tulloch: There are multiple classes of people that are going to get wiped out by this. People who have invested three generations worth of savings -- so grandparents, parents and children - into properties will see their savings evaporate. And then, of course, 50 million construction workers who are working on all these projects around China.

The prognosis of a bubble about to burst isn't only coming from financial gloom-and-doomers. We heard it from the most unlikely source.

Lesley Stahl: Are you the biggest home builder in the world?

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Lesley Stahl: Here's a number I saw. A typical apartment in Shanghai costs about 45 times the average resident's annual salary.

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It could become a debt crisis because of the huge loans most of the developers took out. If they can't repay them, the whole economy'll seize up.

The government's great fear is that all this could lead to social unrest and that's not hypothetical.

Last year when home prices fell, it infuriated all those owners of multiple dwellings, who watched the value of their nest eggs plummet.

Lesley Stahl: And there's already been some demonstrations over real estate around the country.

 


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