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China’s new real estate

China’s real estate market is stranger than Japan’s real estate at the height of its bubble or the U.S. real estate market before the credit melt down. Prices are going up even faster in China than those other places did, yet unlike those other places, few are actually living in the new developments.

The above photo is of a recent complex next to Lvyin Park. It looks nice from the outside. I’m guessing it isn’t as well made as it looks from a distance though. At night, when lights normally go on in occupied apartment buildings, only a small number of the units appear to be occupied. Why? Few Chinese can afford the price.

From my observations, and from hearing what some Chinese people told me, here is one view of how the current Chinese real estate bubble is working. The government owns all the land, which they now view as an investment to make money from. They sell (or lease) the land to a developer at a profit equal to the sales (or lease) price (since the land cost the government nothing, the sale is 100% profit). Since prices are going up at a rapid pace, the developer makes a fortune as well by building a cheaply made building that looks nice. Buyers line up to purchase the units with the hope that prices will continue to increase. The buyers have no intention of ever actually living in the place. A couple years later, assuming prices rise, they dump the apartment to another buyer who won’t live there, and the cycle repeats.

The problem is there are about a million “rich” people in China and about 1.3 billion people who can’t play the real estate game. The million who can play the real estate game aren’t doing much to benefit the other 1.3 billion people, many living in poverty. The million own millions of properties that sit vacant while the vast majority live in cramped and unsanitary conditions. The government and rich grow richer. The masses working for them earn next to nothing.

cbd zhengzhou henan

China’s government has built a new Central Business District (known as the CBD) east of the city center in Zhengzhou. 12 lanes of traffic, 6 in each direction, will someday move cars around the area. The streets (above) were completely empty on the day I visited the place. On the same day I was stuck in several traffic jams just a few kilometers to the west. Those streets were packed with people, bikes, cars, and buses. Why were these empty? They are paved nicely and have fine sidewalks (unlike the other, crowded streets).

At first I thought it was because the buildings must not be finished. True, some were still under construction, but many were completed. I was told that only a few investors have purchased the buildings from the government. No businesses are moving in to the area. Nor are any people. The few investors hope to sell everything (if and) when the prices rise more. But if no one can afford to move in now, how are they going to be able to afford an even higher price later? Someone is going to lose a lot of money when the bubble bursts. It won’t be the Chinese government. It probably won’t be the initial speculators (i.e., those with money and close ties to the government) either.

The sad part isn’t that someone’s investment will drop in value. The disappointing aspect is that the government is making money at the expense of the people rather than doing something to help the people’s standard of living (like invest in the infrastructure where the people actually live).

To stimulate the economy in 2008 and 2009 the Chinese government provided incentives for people to purchase cars. Auto sales jumped, while the roads, which are loaded with potholes and are crowded already, got more congested and the air became filthier still.

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