Tuesday, March 05, 2013

Video: CBS 60 minutes on China’s Ghost Cities: Largest housing bubble in human history

CBS 60 minutes has a very insightful investigative report on China's property bubble. Reporter Lesley Stahl calls this perhaps the largest housing bubble in human history (hat tip Mark Thornton/ Mises Blog)

If video doesn't appear you can watch it here

Some notes: 

-the public's restricted investment options. For instance the public has not been allowed to invest abroad.  Yet such have been a compelling reason for the current bubble. With limited options, housing has likewise been seen as inflation hedge 

The report has been silent on what drives China's inflation, though. Yet easy money policies and stringent capital-currency controls represent financial repression.

-Housing has been the main driver of state dictated statistical economic growth, where real estate has been estimated at 20-30% of the economy 

-The Chinese government spends about $2 trillion to finance between 12 to  24 (mostly ghost) cities every single year!

-Stahl: "It’s all make believe: Non-existent supply for non-existent demand...It’s surreal and it’s everywhere".

 -On China’s urbanization: Properties are unaffordable. The Chinese government, says the interviewed analyst, are building the wrong sorts of apartments. 

In other words, China's centrally planned properties don't meet Chinese consumer needs.

-State driven property bubbles also means a shift of land use from productive to ghost cities. Agricultural properties, like ricefields have been forcibly teared down to accommodate state projects.

-A bubble bust will translate to 3 generations of evaporated savings and millions of construction workers will be out of jobs. 

I would add to the impact of the potential bubble bust: domino effect on the global economy, finance (think US treasuries which the Chinese government may likely sell that may cause higher rates and political friction with the US), commodity markets, globalization and even the geopolitical risks of war in order to mask all such problems

-The biggest developer in China thinks that the Chinese property markets are in a bubble: he says that properties are MORE than 45x average resident’s salary (Shanghai). And that many developers are now in deep debt. And many today suffers from unfinished projects. 

He further adds that property bubble could become a debt crisis because of the scale of the loans.

And economic crisis could lead to social unrest. 

Asked of what could happen on the realization of a bubble burst “Maybe Arabic Spring” says the developer. 

The bottom line: policies of quasi permanent booms has been implicitly designed to preserve the political power of the incumbent Chinese political authorities. Thus, unless they are ready to relinquish such political privileges, such policies are expected to remain in place (despite superficial measures to quell them)

Yet despite all these, a mania still dominates the unwitting buyers of unsustainable ghost cities.

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