Housing Bubble: Why China Has A Huge Problem

I got this video from Zero Hedge, which they got from Australia’s SBS TV’s Dateline program. Unfortunately, I can’t grab the video, but if you click on this link, it will take you to their site where you can watch it. Some of it we’ve seen before, but this reveals the vast scope of government bungling.

 

 

 

 

 

 

 

 

 

 

It proves the lie that China is a market-based economy. The Daily Capitalist has been saying for years now that China is still a command economy with elements of capitalism, that it has a huge property bubble, and that you can’t believe their statistics. As you will see in this video, the top-down commands from Beijing are executed but they have no basis in reality and the result is a huge waste of capital. I don’t know where analyst Gillem Tulloch got the number that there are 64 million empty apartments in in China, but if it is true, that is a staggering amount.

I guess that some wag will say that we had a bubble here too, yet we aren’t a command economy. But that is not quite the case. Our housing market is “gamed” by our government. From tax benefits, to tax credits, to subsidies, to bank incentives, to federal loan guarantees, to cheap Fed money, much of our housing market is not free market based. When you see vast misallocations of capital like this, it can only come from one source: government intervention in the market process.

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6 comments to Housing Bubble: Why China Has A Huge Problem

  • marketseer

    I am a China bear but 64 million doesnt sound like that much. China has 1.3 billion people. 64 million empty apartments is 4.9% of the population. The United States has 19 million vacant homes. We have 307 million people. That is 6.2% of the population. Now I realize you are not comparing apples to apples. Part of that 19 million is vacation homes. 64 million is just apartments, the number may be greater if you add actual homes and maybe condos. Also there could be a massive difference in supply and demand for individual who could even consider buying the property and supply targeting those individuals. Just saying, that number didn’t blow me away.

    • Keith Weiner

      How many homes were vacant at the peak of the bubble? 19M are vacant 5 years later. This suggests that the number of vacancies in China 5 years after their bubble peaks will be higher also. One other tidbid to consider. While their gross population is 1.3B, the number who participate in the modern economy is much smaller. Much of their population are squatting in rice paddies, subsisting. The 64M should be considered as a relationship to only to the portion of their population who are part of the modern economy.

  • Keith Weiner

    Jeff: great article. Our housing “market” is not much of a market, it is mostly government manipulation:

    – the Fed creates trillions of excess “liquidity” that sloshes around looking for a real return greater than the rate of debasement
    – artificially low interest rates kill savers, so people are forced to look for risky assets such as homes and mortgage backed securities
    – but artificially low interest rates make for artificially low mortgage rates, which fuels the bubble
    – Fannie, Freddie, and FHA subsidize loans for housing making them even cheaper still because they encourage investors worldwide to buy them in massive quantities
    – tax policy masquerading as social engineering make home ownership advantageous of renting
    – FDIC moral hazard insurance encourages imprudent bank behavior (e.g. borrowing short to lend long)
    – the Community Reinvestment Act forces banks to extend loans to people that no rational lender would lend to
    – implicit doctrine of “too big to fail” makes big banks very arrogant
    – lengthy permit approval process adds lag to the market, ensuring that supply is not immediately responsive to changes in demand, thus accelerating the parabolic rise in prices and accelerating the collapse once it began
    – many states passed laws that effectively make a home into a corporation that lenders cannot pierce to go after deadbeat borrowers, this probably encouraged recklessness on the part of borrowers
    – homes are one of the assets that are often shielded from creditors in bankruptcy

    I am sure I missed a few important contributors…

    Today, I think there is almost no mortgage market other than the government and its agencies. If someone had to lend his own money, what would his terms be:
    – FICO scores below 800 need not apply
    – no more than 15 year term
    – no less than 25% or 30% downpayment
    – much higher interest rates, say perhaps 10%?

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  • boqueronman

    There is a big difference being missed here. While the exotic mortgage loan instruments – ARMs, liar loans, balloon loans, etc – allowed the U.S. consumer to buy housing they could not afford, the distortion between median income and median home price was nowhere near what it is in China. This from the UK Telegraph: “There, in the city’s vast network of unused air defence bunkers, as many as a million people live in small, windowless rooms that rent for £30 (space 6ft by 9ft) to £50 a month, which is as much as many of the city’s army of migrant labourers can afford.” How much are the realtors charging for the new, high rise apartments (850 sq ft) above ground – on average $300,000. The U.S. real estate disconnect pales in comparison to the China bubble. Who and when does a resident (not an “investor”) purchase and occupy (or even rent) these properties? How long will it take for real income growth to “catch up” to these sales prices? Thus, when will the real estate bubble, the elevated prices, pop? Who knows but the video shows that the structures are already under strain from age and weathering.

  • dave

    If they have population of 1.3B and vacant apartments are 64 million, empty apartments are not 5%. Not that one person lives in one apartment. Sometimes there are 4 or 5 people living in one apartment so there is big change in %age here.