China Ghost Cities
China has created one of the world’s largest real estate bubble in history. An asset bubble is formed when the prices of a specific asset (housing in this case) over-inflates due to excess demand for the asset as an investment vehicle. Prices rise quickly over a short period of time and are not supported by underlying demand for the product itself. China plans to build 20 cities a year for the next 20 years. The unacknowledged problem is finding buyers for those hundreds of millions of new homes that the Chinese government is building for its residents.
China consumes more steel, iron ore and cement per capita than any industrial nation in history. It's all going to railways, roads, and cities that no one will ever use. Researchers have called these empty Chinese Cities, “Ghost Cities,” because no one lives in these newly build cities.
To maintain economic growth while trying to control pressure of inflation, China is concentrating on stimulating local growth through building and infrastructure. In 2011 China injected a $585 Billion dollar stimulus package, of which $220 Billion was allocated toward public infrastructure.
Reports have shown that about 64 million apartments and houses have remained empty over the last 6 months in 2011. A truly shocking statistic considering that this figure represents potential housing for roughly 200 million people or almost two-thirds of the population of The United States. <http://en.wikipedia.org/wiki/Ghost_towns_in_China>
Kangbashi is a great example of a ghost city in China, where over 1 million residents were to live in this city, but only 20,000 actually live in the city. Acres of apartment complexes, many of them luxurious by Chinese standards, are deserted. Store fronts are boarded up. When they first began building Kangbashi, there was a frenzy of investment. The local government contributed a £200m road network. Nearly all of the homes that are empty were sold off-plan.
The buyers that purchased investment property in Kangbashi were China's cashed-up new middle class. The country's non-regulated stock markets, along with controls on investing overseas, have made second, third and even fourth homes a popular store of wealth. Now Kangbashi with other Chinese Ghost Cities around China has come to symbolize what many believe is a dangerous property bubble that could be primed to pop.
Investors interested in Chinese Real Estate must be aware that a Chinese Real Estate bubble has formed and the ROI for any investment property in China will be detrimental to anyone’s financial portfolio.
Over the past five years the country has built nearly 40 million new homes. In some cities the price of housing has tripled in the same period. China one of the world's largest economy, and by some estimates nearly half of its GDP is in some way linked to property. Once the housing bubble does deflate, many economists believe that China will go into a recession if not depression.
Real estate is a foundation of China's phenomenal growth record in the past two decades, and real estate is crucial to China's construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay. Local municipalities and provinces depend on rising prices for land sales as well to fund infrastructure projects. If the return on investment for Chinese Property turns negative then the entire Chinese economy will be impacted.
140% nationwide house price rise since 2007
Outstanding real estate developer loans are up 50% in two years
Beijing land prices are up 788% in eight years
Purchase price is outpacing rental price - another indication of speculation
China’s real estate is in a massive bubble, please view this Chinese Ghost Cities documentary. You can see first hand just how unpopulated these, “Ghost Cities,” really are.