When I was in China last year there were certainly visible signs of a real estate bubble, and there’s tons of reporting to back that up. But I also continue to be somewhat confused by the concept of such a bubble in a country like China that continues to feature hundreds of millions of people living in plainly substandard housing. For example, Sarah Goodyear writes the following about an Australian TV report on new Chinese ghost cities:
According to Hong Kong-based real estate analyst Gillem Tulloch, who is interviewed in the piece, the housing units are priced well above what an average Chinese person can afford. The result, he says, is a housing bubble that is terrifying in size, “a property bubble like which I don’t think we’ve ever seen,” he says. “It will make the United States pale in comparison. It’s said that there’s around 64 million empty apartments…. It’s essentially the modern equivalent of building pyramids. It doesn’t add to the betterment of people’s lives, all it does is it promotes GDP.”
As the Dateline report points out, there are indeed tens of millions of Chinese people who would like to own their own homes—but the urban development the government has backed is creating housing stock that is hopelessly out of their reach, even as it destroys old neighborhoods and cities at a feverish pace.
If you have a lot of housing units whose current sale price is unrealistically high given the average income of Chinese households, then clearly prices need to fall. And there will be economic consequences to that. But how is it that it “doesn’t add to the betterment of people’s lives”? The price of the houses won’t fall to zero, after all, it will fall to some level that’s realistic given the average income of Chinese households. And once it’s reached that level, people will move into the houses. Houses that are better than the houses they’re currently living in.
In other words, there are two kinds of problems with a real estate boom. One is potential financial fallout. But another is the idea of just over-investing in new houses. Given that back in 2000 Americans already enjoyed the largest, nicest houses in the world overbuilding seems like it was really wasteful. Not just a little not-so-efficient and non-optimal, but really and truly a giant waste. But China’s not really like that. If the upshot of the building boom is that everyone gets a nicer house, then that’s nicer houses for people who are currently living in really crappy houses. That might not be the optimal allocation of capital, but it’s not nothing either.