"The Chinese are treating apartments like Beanie Babies."

[randomness]

Jay Hancock explains how the Chinese housing bubble is different from the American one:

A Chinese housing bubble is not like an American housing bubble. The American bubble has popped. The Chinese one hasn't. Yet. Americans bought houses. The Chinese in Beijing and Shanghai buy apartments. Americans bought with no money down. Many Chinese still pay cash with no mortgage. American real estate was lived-in during the bubble and became vacant afterward. Hyperappreciated Chinese real estate, on the other hand, is already vacant. Nobody ever lived there, at least to a large degree.

More than half the apartments in Beijing and Shanghai may be unoccupied, China Daily reported last summer, citing figures from Sina.com. In Hainan it may be as high as 70 percent. The titles are clean. The mortgages are paid on time, when they exist. But nobody's home. And the owners wouldn't think of renting, says Patrick Chovanec, associate professor at Tsinghua University in Beijing. They don't want to mar their precious assets with people walking on the floors and opening and closing the doors.

Apartments seem to play the same role in modern China that gold often does in India -- a place to invest and store your money. Wealth is cascading into Beijing. But you can't invest it in the S&P 500; currency and capital controls prevent investments abroad. You could put it in bank and earn 2 percent, but Chinese inflation is perhaps 6 percent or 8 percent. Who wants to lose money doing that? So the Chinese sock their savings away in a nice flat, and since nobody wants a used apartment they don't allow anyone in the place.

In a comment, A. G. Sage sums it up in one sentence: "The Chinese are treating apartments like Beanie Babies."

Comments

[woodwardiocom.livejournal.com]

Are rents legally fixed or somesuch? Otherwise I'd really expect rents to follow the value of the real estate upward.

[cerebralpaladin.livejournal.com]

I think there may actually be a real housing glut--i.e. many more apartments than there are people who want to live in them, at least at the general price level for which they're offered. (There are likely relatively poor people living 10 to a room or whatever in the cities, but they're not part of the potential rental market for luxury apartments.)

The thing that is scary about this, to me, is that the world economy is already pretty badly screwed up, and yet it's obvious that there is a risk of a major bubble bursting mess in China at the same time. I mean, we can hope that that would have some positive effects (people moving spending into areas that are more in the way of consumption in China, capital flowing out of China instead of just in, changes in relative currency values)... but I'm not sure that I believe any of that. Instead, the collapse of the house of cards could make the world economy worse...

[r-ness.livejournal.com]

I think there may actually be a real housing glut--i.e. many more apartments than there are people who want to live in them, at least at the general price level for which they're offered. (There are likely relatively poor people living 10 to a room or whatever in the cities, but they're not part of the potential rental market for luxury apartments.)

Exactly right.

From the NYTimes, earlier this year:

And as the prices of new apartments soar — in Shanghai, for instance, they often exceed $200,000, while the average disposable income is about $4,000 a year — the trend also threatens to undermine the central government’s goal of affordable housing for the rising middle class.

I think I'll discuss the second part of your comment in a separate post.

[stolen-tea.livejournal.com]

This reminds me, in spirit, of when the traders got into food commodity futures for lack of any more stable place to invest, and promptly disrupted all the people who were using those markets to actually ensure their ability to buy and sell food.