Tuesday, December 6, 2011

Too strange: real estate in China

Several years ago (2003) the inner-mongolian city of Ordos decided to build a new city for one million people.  Until recently Ordos was a building site, despite the fact that most of the city that has been built was a ghost city -- amazingly enough despite this city having a capacity of nearly a million, no more than 50,000 people living there.

Surprisingly, real estate prices in Ordos are only now beginning to fall, to the despair of the owners (20 to 30%).  For nearly 10 years the city of Ordos has been empty, these property generated no income for the owners and despite this, property prices remained high.  

There are some Chinese peculiarities, first off, Chinese home buyer will pay a premium for a brand new home (for some reason they think its like a new car), so speculators buy real estate and keep them empty -- waiting for prices to rise, and not relying on rental income.  Hence, China probably has more than 65 million empty homes -- to give an order of proportion, in America there are approximately 120 million households... 

Nevertheless, there was never any reason to build Ordos, it is far from everything, in an area of China that has low population density (relatively speaking).  Now building of new apartments has come to a halt, as buyers are getting scarce,  Check the video here

Moreover, the city has been built on debt (including a spectacular museum) that will never be repaid.  Like all bubble, the Chinese real estate sector is built on trust and hope.  Once investors figure out that there is simply no demand for the apartments they own, they will begin to liquidate.  Investors are still (today) working on the idea that the market will quickly recover.  There are stories of investors protesting at the office of real estate developers because of price cuts, while at the same time calling their friends to come and buy an apartment at the new low price.

That's why so many investors are concerned about China's banking sector.  It is easy to forget that the 2002 banking bust (where the government created good/bad bank structures) has still not been resolved -- really!  This will be interesting


Anonymous IDX Website said...

Another informative blog… Thank you for sharing it… Best of luck for further endeavor too.

December 6, 2011 at 10:52 PM  

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