<HTML><HEAD> <META name=GENERATOR content="MSHTML 8.00.6001.19019"></HEAD> <BODY> <DIV id=post-9695 class="post-9695 post type-post status-publish format-standard hentry category-china category-housing-bubble tag-capitalism tag-china tag-china-economy tag-china-housing-bubble tag-command-economy odd"> <DIV class=post-headline> <H1>Housing Bubble: Why China Has A Huge Problem</H1></DIV> <DIV class=post-byline>By Jeff Harding, on March 25th, 2011</DIV> <DIV class="post-bodycopy clearfix"> <P>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 <STRONG><A onclick="javascript:_gaq.push(['_trackEvent','outbound-article','www.sbs.com.au']);" href="http://www.sbs.com.au/dateline/story/watch/id/601007/n/China-s-Ghost-Cities" target=_blank>click on this link</A></STRONG>, 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.</P> <P><A href="http://dailycapitalist.com/wp-content/uploads/2011/03/Chinas-Ghost-Cities.png"><IMG class="alignleft size-full wp-image-9696" title="China's Ghost Cities" alt="" src="ctsChinas-Ghost-Cities.png" width=783 height=256></A></P> <P>&nbsp;</P> <P>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&nbsp;empty&nbsp;apartments in in China, but if it is true, that is a staggering amount.</P> <P>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.</P> <DIV class=addtoany_share_save_container> <DIV class="a2a_kit addtoany_list"><A class="a2a_dd addtoany_share_save" onclick="javascript:_gaq.push(['_trackEvent','outbound-article','www.addtoany.com']);" href="http://www.addtoany.com/share_save#url=http%3A%2F%2Fdailycapitalist.com%2F2011%2F03%2F25%2Fhousing-bubble-why-china-has-a-huge-problem%2F&amp;title=Housing%20Bubble%3A%20Why%20China%20Has%20A%20Huge%20Problem&amp;description=I%20got%20this%20video%20from%20Zero%20Hedge%2C%20which%20they%20got%20from%20Australia%27s%20SBS%20TV%27s%20Dateline%20program.%20Unfortunately%2C%20I%20can%27t%20grab%20the%20video%2C%20but%20if%20you%20click%20on%20this"></A></DIV></DIV></DIV> <DIV class=post-footer>March 25th, 2011 | Tags: <A href="http://dailycapitalist.com/tag/capitalism/" rel=tag>capitalism</A>, <A href="http://dailycapitalist.com/tag/china/" rel=tag>China</A>, <A href="http://dailycapitalist.com/tag/china-economy/" rel=tag>China economy</A>, <A href="http://dailycapitalist.com/tag/china-housing-bubble/" rel=tag>China housing bubble</A>, <A href="http://dailycapitalist.com/tag/command-economy/" rel=tag>command economy</A> | Category: <A title="View all posts in China" href="http://dailycapitalist.com/category/china/" rel="category tag">China</A>, <A title="View all posts in housing bubble" href="http://dailycapitalist.com/category/housing-bubble/" rel="category tag">housing bubble</A> | <A class=comments-link title="Comment on Housing Bubble: Why China Has A Huge Problem" href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/#comments">6 comments</A> </DIV></DIV><!-- / Post --><A name=comments></A><!-- named anchor for skip links --> <H3 id=comments>6 comments to Housing Bubble: Why China Has A Huge Problem</H3><!-- Comment List --> <UL class=commentlist> <LI id=comment-14847 class="comment even thread-even depth-1 clearfix"> <DIV id=div-comment-14847 class="clearfix comment-container"> <DIV class="comment-author vcard"><IMG class="avatar avatar-30 photo" alt="" src="ctsresource/ctsd30e50f6fbd099b072219049f6434ca6fs=30&amp;d=identicon&amp;r=G" width=30 height=30> <SPAN class=authorname>marketseer</SPAN> </DIV> <DIV class="comment-meta commentmetadata"><A href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/comment-page-1/#comment-14847">March 25, 2011 at 1:28 pm</A> <SPAN class=comment-reply-link><A class=comment-reply-link onclick='return addComment.moveForm("comment-14847", "14847", "respond", "9695")' href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/?replytocom=14847#respond"> Reply</A></SPAN> </DIV> <P>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.</P></DIV> <UL class=children> <LI id=comment-14929 class="comment odd alt depth-2 clearfix"> <DIV id=div-comment-14929 class="clearfix comment-container"> <DIV class="comment-author vcard"><IMG class="avatar avatar-30 photo" alt="" src="ctsresource/ctseb8146f1858b313953c5f70749613442fs=30&amp;d=identicon&amp;r=G" width=30 height=30> <SPAN class=authorname>Keith Weiner</SPAN> </DIV> <DIV class="comment-meta commentmetadata"><A href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/comment-page-1/#comment-14929">March 26, 2011 at 9:32 pm</A> <SPAN class=comment-reply-link><A class=comment-reply-link onclick='return addComment.moveForm("comment-14929", "14929", "respond", "9695")' href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/?replytocom=14929#respond"> Reply</A></SPAN> </DIV> <P>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.</P></DIV></LI></UL> <LI id=comment-14930 class="comment even thread-odd thread-alt depth-1 clearfix"> <DIV id=div-comment-14930 class="clearfix comment-container"> <DIV class="comment-author vcard"><IMG class="avatar avatar-30 photo" alt="" src="ctsresource/ctseb8146f1858b313953c5f70749613442fs=30&amp;d=identicon&amp;r=G" width=30 height=30> <SPAN class=authorname>Keith Weiner</SPAN> </DIV> <DIV class="comment-meta commentmetadata"><A href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/comment-page-1/#comment-14930">March 26, 2011 at 9:41 pm</A> <SPAN class=comment-reply-link><A class=comment-reply-link onclick='return addComment.moveForm("comment-14930", "14930", "respond", "9695")' href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/?replytocom=14930#respond"> Reply</A></SPAN> </DIV> <P>Jeff: great article. Our housing  market is not much of a market, it is mostly government manipulation:</P> <P> the Fed creates trillions of excess  liquidity that sloshes around looking for a real return greater than the rate of debasement<BR> artificially low interest rates kill savers, so people are forced to look for risky assets such as homes and mortgage backed securities<BR> but artificially low interest rates make for artificially low mortgage rates, which fuels the bubble<BR> Fannie, Freddie, and FHA subsidize loans for housing making them even cheaper still because they encourage investors worldwide to buy them in massive quantities<BR> tax policy masquerading as social engineering make home ownership advantageous of renting<BR> FDIC moral hazard insurance encourages imprudent bank behavior (e.g. borrowing short to lend long)<BR> the Community Reinvestment Act forces banks to extend loans to people that no rational lender would lend to<BR> implicit doctrine of  too big to fail makes big banks very arrogant<BR> 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<BR> 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<BR> homes are one of the assets that are often shielded from creditors in bankruptcy</P> <P>I am sure I missed a few important contributors& </P> <P>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:<BR> FICO scores below 800 need not apply<BR> no more than 15 year term<BR> no less than 25% or 30% downpayment<BR> much higher interest rates, say perhaps 10%?</P></DIV> <LI id=comment-14974 class="pingback odd alt thread-even depth-1 clearfix"> <DIV id=div-comment-14974 class="clearfix comment-container"> <DIV class="comment-author vcard"><SPAN class=authorname><A class=url onclick="javascript:_gaq.push(['_trackEvent','outbound-commentauthor','yetanotherspace.wordpress.com']);" href="http://yetanotherspace.wordpress.com/2011/03/28/housing-bubble-why-china-has-a-huge-problem-the-daily-capitalist/" rel="external nofollow">Housing Bubble: Why China Has A Huge Problem | The Daily Capitalist dennis' space</A></SPAN> </DIV> <DIV class="comment-meta commentmetadata"><A href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/comment-page-1/#comment-14974">March 28, 2011 at 12:20 am</A> <SPAN class=comment-reply-link><A class=comment-reply-link onclick='return addComment.moveForm("comment-14974", "14974", "respond", "9695")' href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/?replytocom=14974#respond"> Reply</A></SPAN> </DIV> <P>[...] via Housing Bubble: Why China Has A Huge Problem | The Daily Capitalist. [...]</P></DIV> <LI id=comment-14994 class="comment even thread-odd thread-alt depth-1 clearfix"> <DIV id=div-comment-14994 class="clearfix comment-container"> <DIV class="comment-author vcard"><IMG class="avatar avatar-30 photo" alt="" src="ctsresource/cts447d3f2b1eabe37d4ea6c95071be945cfs=30&amp;d=identicon&amp;r=G" width=30 height=30> <SPAN class=authorname>boqueronman</SPAN> </DIV> <DIV class="comment-meta commentmetadata"><A href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/comment-page-1/#comment-14994">March 28, 2011 at 12:01 pm</A> <SPAN class=comment-reply-link><A class=comment-reply-link onclick='return addComment.moveForm("comment-14994", "14994", "respond", "9695")' href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/?replytocom=14994#respond"> Reply</A></SPAN> </DIV> <P>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.</P></DIV> <LI id=comment-15768 class="comment odd alt thread-even depth-1 clearfix"> <DIV id=div-comment-15768 class="clearfix comment-container"> <DIV class="comment-author vcard"><IMG class="avatar avatar-30 photo avatar-default" alt="" src="ctsresource/ctsfd=identicon&amp;s=30" width=30 height=30> <SPAN class=authorname>dave</SPAN> </DIV> <DIV class="comment-meta commentmetadata"><A href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/comment-page-1/#comment-15768">April 14, 2011 at 12:08 am</A> <SPAN class=comment-reply-link><A class=comment-reply-link onclick='return addComment.moveForm("comment-15768", "15768", "respond", "9695")' href="http://dailycapitalist.com/2011/03/25/housing-bubble-why-china-has-a-huge-problem/?replytocom=15768#respond"> Reply</A></SPAN> </DIV> <P>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.</P></DIV></LI></UL></BODY></HTML>