Why More Then 50 Million Chinese Homes are Empty

Deep, in the mountains of Austria, lies thesmall, but scenic town of Hallstatt. But this isn’t that, It’s an exact replica,built 9,000 kilometers away, near Hong Kong. Austria. China. It’s home to European architecture, Chinesecuisine, and all the traffic of… North Korea. Because, during the day, it may be the weddingphoto capital of the region, But after the sun sets, its cottages becomeremarkably quiet. China’s lookalike towns, of places likeParis, Berlin, London, and Jackson Hole, Wyoming, aren’t alone. In many places, across China, there are farmore houses than there are people. Long rows of apartments, even entire cities,sit completely, or mostly empty. In total, approximately 50 million units,Or 22% of China’s entire urban housing. But this doesn’t mean they aren’t beingbought. Because, they are. Like crazy. Ten years ago, most people were, as you’dexpect, buying homes for the first time. Today, it looks like this. Second homes are the majority, and peopleare buying almost as many third homes as first! These aren’t cheap, either. In Los Angeles, the price per square footis $633. In Shenzhen, 805. And, close your eyes, because you don’teven wanna know the price in Hong Kong. Now consider the difference in wages. The average annual income in Shenzhen is around7,500 US Dollars, compared to 60 thousand in LA. Something clearly doesn’t add up. People in China are buying homes like Americansbuy… cars, But they’re leaving them empty, And it’s not clear where the money is comingfrom, or why they’re being built. The usual explanation is that China’s governmentis so desperate for economic growth that it builds bridges to nowhere and houses to…look at. But that’s only one part of a much biggerstory. China’s troubles begin with its politicalsystem. The Central Government is the highest levelof its only party. Here, laws are written and the fate of thenation, decided. Beijing is THE ultimate authority. It appoints everyone from secretaries to governors,and isn’t afraid to move them around should any one official gain too much influence. BUT – it would also be a mistake to see Chinaas one, singular power. Because below the central government is anetwork of local divisions: 22 regional provinces, 4 municipalities, 4 autonomous regions, and2 Special Administrative. Under those are over 300 prefectures. Followed by the less important counties, townships,and villages. Now, just as Californians have different concernsthan do Texans or Floridians,

China is a big country, and the interestsof a coastal exporter like Shenzhen are very different than those of, say, a more independentregion like Inner Mongolia. The same is true for different levels of government. While Beijing writes the rules, cities applyand enforce them. Often, very differently. And there’s one, awkward little detail:Cities receive just 40% of tax revenue, but are responsible for 80% of their expenses. So, naturally, they need another source ofincome. And this is where things get interesting. In China, rural land is collectively owned. Everyone, and also no-one, owns it, whichmeans it can’t be the location of a new luxury apartment. But luckily for cities, they have the powerto rezone land from rural to urban, which can be developed. In other words, they own a money printingmachine. Watch this: First, a city buys cheap, ruralland, Which it then redefines as urban, And finally, sells to developers at its now, muchhigher, price. Like. Magic. Over, and over, and over, again. Cities get much-needed cash, and developersbuild housing like it’s nobody’s business. Now, unlike states in America, local governmentshere are generally forbidden from taking loans. But, again, there’s a loophole. Cities can create a Local Government FinancialVehicle, which is a fancy way of saying, a state-owned company. And by “giving” it that new urban land,the “company” can do what the city legally can’t: borrow money. Which, they can use to build roads, schools,and, on occasion, replica Austrian towns. This is so effective that, in some years,land sales account for 40% of local government revenue. Plus, all this construction increases GDP,which just so happens to be the way officials get promoted. It’s a perfect system. At least, until it’s not. If, or, when, housing prices fall, so doescity revenue. And, all those loans probably won’t magicallydisappear. Beijing wants to avoid a housing crisis, butcities just want to survive, and governors, get promoted, which puts the two at odds. Eventually, cities start running out of landto sell, and have no choice but to build more. Like this one, which spent 2 billion dollarsblowing up the tops of mountains. Those developers who purchase that land, bythe way, are required to use it, which leads to many, often quickly-constructed, low-quality,houses. And that brings us to the second question:why are people buying them?

And doing it like their life depended on it? Well, for one, because it kinda does. Thanks to the famous One Child Policy, Chinanow has the entire population of Canada more men than women. And that means fierce competition for marriage. Men are expected to own at least one propertybefore even being considered. It’s one of the most important elementsof social status. For many, real estate isn’t just an opportunity,it’s a downright social necessity. Because of this, friends and family pool moneytogether to help buy homes for their children. And that’s how, nearly everyone, in a countrywith the per capita GDP of the Dominican Republic, can afford some of the most expensive homeson the planet. The other big factor is that Chinese citizensSave. Like. Crazy. When it comes to saving money, there’s China,and then there’s basically everyone else. Where, Europeans put 4 percent of their disposableincome in the piggy bank, Chinese drop nearly 40! The problem is, where can they put it?. China’s domestic stock market is just toorisky, And its banks are often seen as unpredictable. Which makes real estate a Chinese investor’sbest friend. It alone accounts for 70% of all householdwealth. It also doesn’t hurt that property tax isa beautiful 0%. When taxes are only paid upfront, why wouldn’tyou buy as soon as possible, and just sit on it? Put all this together, and you have a recipefor extreme house buying. An amazing 90% of homes are owned by theirresidents. Europe and the U.S., stand at 69 and 64%,respectively. And while we’re on the subject of crazyhigh numbers, Ninety-four percent of Chinese millennials who don’t already own, planon buying in the next five years. What else do 94% of people agree on? Not even China can quench this thirst forreal estate. Despite laws against it, billions of dollarsflow out of the country every year into foreign property. It’s so common in places like Vancouver,that, earlier this year, it introduced a 20% tax for foreigners. The irony is that while cities like Beijingand Hong Kong have so little room, people are forced to sleep underground, these 50million homes can’t find renters. So, hey, if you live in California, I thinkI may have found an escape plan. Anyway, not only are these homes bought withoutinteriors, literally just concrete walls, but they’re also usually located outsidecity centers, where there aren’t as many jobs. Now, the assumption in all of this, is that,eventually, people will come, And speculation will become reality. The Eastern side of Shanghai, for example,was once laughed at by Milton Friedman for being totally empty. Today, as a financial capital of the world,with a GDP of 400 billion, we can pretty safely say it’s proven the haters wrong. China is in the process of migrating 300 millionpeople from country to city, And, of course, they’ll need a place to live. Inevitably, many of these cities will springto life.

That doesn’t mean everything is peachy. A few things are decidedly not peachy. First, remember that the vast majority ofempty homes is expensive, commodity housing. These are not the kinds of places you buycoming from a farm in the country. And second, all these homes have an expirationdate. In China, a building can be owned, but theland beneath it can only ever be leased – from the government, for 70 years. After that, it’s anyone’s guess whetherownership will be renewed. And if so, for how much. But, the truth is, 70 years is pretty optimistic… Think about it this way: If construction isgood for GDP, why build once, when you can build and re-build every few years? It’s kinda like the iPhone, if you’d liketo upgrade every year, Apple will happily sell you a new phone. It’s certainly not judging. Except, in the case of China’s housing,developers are incentivized to make short-term bets, they know their homes will only lasta few decades anyway, which means using lower quality materials. Meanwhile, cities continue taking loans andhousing prices continue rising unsustainably. Of course, Beijing knows all this. It’s aware of the bubble, the risks involved,and it knows more or less how to fix it – some combination of slowing down lending, reining-inlocal governments, and introducing a property tax, like Shanghai. The problem is, real estate is so intertwinedwith its GDP, that any of these solutions would seriously risk slowing down its economy. In the coming decades, the world will watchas China does its best to carefully balance its enormous challenges with its relentlessdesire to grow its economy and realize The Chinese Dream. As Beijing prepares for economic change bydiversifying its revenue, You and I should do the same. Today’s sponsor, Skillshare, helps you learnnew things so you can do just that. If you’re still watching this, it’s clearthat a) You like learning things and b) You learn visually, which means Skillshare’svideo lessons are perfect for you. There are classes on starting your own business,taught by successful entrepreneurs,

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