The scariest housing bubble

China’s ‘ghost cities’ are raising fears of an epic crash with global consequences

The scariest housing bubble


In Ordos, a city of 1.5 million in Inner Mongolia, there sits a mostly vacant district that was built to house and service another one million people, complete with huge public squares and museums. In Dongguan, more than 2,500 km to the south, the sprawling New South China Mall opened in 2005 to host an expected 70,000 shoppers each day, but remains mostly empty. Other so-called “ghost cities” are strewn across China.

When China’s economy was flying, such spending was little more than a curiosity, an inevitable by-product of a rapidly urbanizing country of 1.3 billion where construction investment accounts for nearly half of GDP. But these days, economic growth is slowing—the government is targeting 7.5 per cent this year, compared to more than nine per cent a few years ago—and all those empty apartments are beginning to look more sinister. Are they evidence of an epic real estate bubble waiting to burst, with global consequences, or just another relatively harmless sideshow of China’s centrally managed economy?

There’s little doubt that Beijing’s policy-makers are wrestling with an overheated property market. In a bid to clamp down on speculators who are driving up prices on units they don’t plan to live in, the government recently unveiled plans to introduce a new 20 per cent tax on profits from home sales, while raising down-payment requirements in certain cities. That, in turn, sparked a buying frenzy ahead of the new rules. In Beijing, home sales spiked 280 per cent during the first week of March, compared to the same period a year earlier. Adding fuel to the fire was a recent 60 Minutes report in which a reporter toured vacant development projects and interviewed Wang Shi, the chairman of Vanke, one of China’s biggest real estate developers. Wang said he believes China is currently in the grips of a real estate bubble and its burst would trigger an Arab Spring-like uprising. The stocks of several Chinese developers plummeted soon after the program aired.

The prospect of a housing downturn in China is not to be taken lightly. The sector has been called one of the most important in the world, influencing global prices for everything from lumber to iron ore. But experts say it’s a mistake to confuse a handful of vacant developments with the property market as whole. While empty buildings are a sure sign of overcapacity in some areas (some reports claim as many as 64 million apartments are unoccupied), big cities like Beijing, Shanghai and Shenzen continue to face a chronic shortage of housing, keeping prices up. It’s essentially the tale of two housing markets: China’s thriving coastal cities and sleepier inland centres the government is keen to develop.

David Cohen, a forestry professor at the University of British Columbia, is one of many who believe a U.S.-like housing crash is extremely unlikely in China, despite reports that overbuilding accounts for as much as 10 per cent of GDP. “We’ve already seen a number of moves over the last three years to restrict construction of mid- to high-rise apartments, which tend to be the ones to be flipped,” he says, adding that Beijing’s technocrats have so far shown an uncanny ability to use the levers of power to prevent the economy from running off the rails. The most recent example is an $800-billion program to build 36 million units of affordable housing by 2015. The program aims to maintain China’s all-important economic growth even as efforts to curb speculative property purchases begin to bite. It’s also designed to head off any social unrest brought on by high housing prices. Another safety valve is built in: the huge number of Chinese who continue to migrate from rural areas into cities. “The underlying demand for urban housing in China is very strong, and that demand will kick in relatively quickly to provide a floor to any downturn,” says Yuen Pau Woo, the CEO of the Asia Pacific Foundation of Canada.

Aprodicio Laquian, a professor emeritus of community and regional planning at UBC, recalls visiting similar empty apartment buildings in Guangzhou more than a decade ago—all of which are now fully occupied. “The Chinese use urbanization as a developing tool,” he says. “They use it as a way to move people closer to jobs. But in order to convince people to move to some of these areas, you have to build everything first.”

Some even argue that China’s forest of vacant apartments and office towers are actually lesser evils in a country where investment, not consumption, drives growth. A far worse outcome, argues Jonathan Anderson, a partner at Emerging Advisors Group, would have been to pour the money into manufacturing and services, which would create excess capacity in the economy, thus driving down corporate profits and workers’ wages. An empty city or two, by contrast, doesn’t really harm the country as a whole. “If you’re going to waste capital,” Anderson writes in a recent report, “best to waste it completely, where it will do the least damage to everyone else.”

Looking for more?

Get the Best of Maclean's sent straight to your inbox. Sign up for news, commentary and analysis.