Ghost housing: housing for capital growth over occupancy.
There has been the term ‘ghost town’ for a town where the buildings remain, but the people have gone, and now we have the reverse, ‘ghost cities’ where building are ready but the people have never been present, and ‘ghost homes’ which are individual homes intentionally left unoccupied while investors are confident property value growth will provide a return on investment, even while the property is vacant.
In the modern world, real estate investments can have two objectives:
- capital gain.
- returns use as housing such rental income, and ‘self rental’ when owner occupied.
Ghost housing is a result of taking focus on number 1), the capital gain to extreme levels, where number 2) returns from use as housing becomes insignificant. Is this a problem restricted to China, or is it just the symptoms can be more apparent when looking at ‘ghost housing’?
Entire Ghost Cities: In China and Even Beyond.
The many, huge, never occupied, cities in China.
Although I had previously seen stories on ghost cities, it was the video to the left that was the single biggest contributor to providing me with perspective on the topic.
Digging further, information on ghost cities goes back almost two decades, with stories such as the one quoted below:
It was 2006 when, wandering around China, the reporter Wade Shepard found out a city that was almost empty. It was not an ancient village, neither an abandoned town. It actually seemed a newly built urban centre, waiting for potential inhabitants to came in and take advantage of its various apartments and facilities.
Chinese Ghost Cities – Their genesys and the current situation
Entire ghost cities have existed at least since 2002, and while the first video above is by an independent who could be described either as an ‘independent investigative journalist’ or a ‘youtuber’, the phenomenon of ghost cities has also been documented by universities, and government backed broadcasters like SBS from Australia, for well over a decade.
Investment in ‘pure’ ghost housing in China.
An very important point is made by “serpenza” in his video on Ghost cities from 5:30 in the video. “Investment properties around China in general are just complete husks that look like they are under construction still … and there is a very good reason for this, and the reason is that if you were to [make the apartment ready for occupation] the value would actually go down”. The rental returns in China are so low relative to the high mortgage repayments, that all focus is on capital gain, and capital gain is less if the apartments have been lived in. So, in China, and for Chinese people investing property, the investment is most often, like an investment in gold, all about capital gain, and not about earning any income while holding onto that investment.
Explanations on the origin, and proliferation of ghost cities.
No one single goal, no one single outcome.
Almost every report on ghost cities in China provides a different perspective on the goals and outcomes from the ghost cities of China. There is some suggestion that at least some cities began in anticipation of a huge wave of mass migration from rural China, that either did not turn eventuate, or perhaps in some cases could still arrive. Then there are suggestions that regional administrations were initiated building cities to drive employment and stimulate the economy. And next, there is the motive of greed, as local authorities earn income from rezoning and selling the land to developers who realise a profit from selling the housing to investors in the properties, and even when no one occupies the apartments, investors still somehow hold appreciating assets.
It a ghost cities remains unoccupied too long, nature starts to reclaim and the city will clearly be worth far below the cost of construction, but this may not be the fate of all ghost cities. There are reports that there are cities that have progressed from ghost city to actually city, but even those reports conclude that this is simply not possible for all ghost cities in China.
The potential to one day become real cities, whether that potential is realistic or not, can allow investors in the apartments in ghost cities to be have their investments seen as not only retaining their value, but even increasing in value.
Homes ready for a mass migration from the the countryside to cities?
It has been described as the greatest migration in human history, a mass exodus of hundreds of millions of people from China’s countryside to its fast-growing cities.
Washington Post: China’s peasants left for the cities to seek their fortune, and it made them miserable
All told, some 230m Chinese spend most of the year away from their home town or village. This is almost a third of all people globally estimated by the UN to be migrating within the borders of their own country. Most migrants move in search of work.
China: The Largest Migration in Human History
Clearly, China has seen a huge migration from rural China to the cities, and there were predictions this migration would continue, however the most recent push from the central government is for some of that migration to now be reversed.
In antipoverty push, President Xi wants to repopulate rural towns with entrepreneurs and consumers: ‘there was hope in our hometown’.
WSJ Nov 2020: China Urges New Era of Mass Migration – Back to the Countryside.
China is a nation heading for population decrease.
2022 is the year of peak population inChina, with population estimated to fall by almost 1/3 to around 1 billion by 2100, and these this future projection is based on the same data that expected the peak to be 10 years later, so the population decrease may be even faster. Difficult to see who will occupy these homes.
Regional Governments Stimulating Economic Growth.
“Local governments around the country tried to juice and stimulate their economies by building more infrastructure and stimulating the property market.”
China’s eerie ghost cities a ‘symptom’ of the country’s economic troubles and housing bubble
This seemingly wasteful construction is carried out by both state-owned firms and private companies.
An important point to note is that both state owned firms and private companies seem to, at least on many occasions, successfully sell all the housing to private individual investors even without anyone living in the ghost cities.
No matter what the original explanation for ghost cities was, they became a way of printing money. Regional governments raise revenue from selling the land to government backed and/or private development companies, who then sell properties in ghost cities to the public, and the public can see the value of property they own rise as all real estate value in China rise.
The Profit Motive: Ghost cities have become like printing money.
A way printing money, even successful ones, are not a guarantee there will always be profit. Just because the public has invested in some properties in some ghost cities, does not guarantee that all developments will be profitable. Reports are the Chinese developers who were until recently generating enormous fortunes, are no longer enjoying the same rate of success:
The China Evergrande Group chairman [in 2018] was in his prime — with $US40 billion ($55.6 billion) in wealth, he rivalled Jack Ma as the nation’s richest person. He made a point to attribute his success to the Communist Party. That year, about a fifth of the country’s billionaires hailed from a real estate sector that revelled in rags-to-riches stories like Hui’s.
All that has changed since then. China’s year-long campaign to control runaway property prices has pummelled its biggest developers, tanking home sales 11 months straight and obliterating $US65 billion ($90 billion) in wealth for real estate moguls. A Bloomberg Intelligence gauge of Chinese property stocks sank on Monday to a five-year low versus the Hang Seng China Enterprises Index.
President Xi Jinping’s resolve to achieve “common prosperity” is marking a watershed shift, signalling the end of China’s property billionaire factory.
“The golden days are over,” said Craig Botham, chief China economist of Pantheon Macroeconomics. “Property can’t be the engine for economic growth or wealth accumulation. It’s in the past.”
June 10, 2022: ‘Golden days are over’: China’s property tycoons suffer $90b meltdown
Ghost Cities Beyond China.
The Forest City project spans across a handful of artificial plots of land that are growing out from the shore of Peninsular Malaysia towards Singapore. When finished, it will be a new city built for upwards of 700,000 people that is intended to become a financial and commercial epicenter to rival Singapore or any other in the world.
It is being built with $100 billion — yes, billion — of investment from China’s Country Garden group, who are acting in conjunction with the construction company that’s owned by the sultan of Johor.
Through the beginning stages of the project many of the properties — which very much fall on the luxury side of the line — where bought up by Chinese investors. However, with new capital outflow restrictions that Beijing imposed in 2017, this stream of sales has pretty much dried up.
2018: Inside China’s Ghost City In Malaysia
I discovered the ghost town thanks to Wander-Lush’s blog. She was the one who did the research I can now get my hands on, so hats off to her! I learned from her writing that the project ran from 2007 to 2012. According to her sources (which she doesn’t claim to necessarily be 100% accurate), somewhere around two-thirds of the mansions had been bought back in 2014. However, the owners only ever paid partial payments. Work in the area appeared to stop and the values of the buildings plummeted. Rather than continuing to spend on the project, most of the owners are simply sitting on their ass(ets). presumably waiting for some sort of shift in the housing market. Some people are moving in. A few of the mansions have gates, which appears to be the sign of habitation. Some owners are really going to town on their property!
2018: Hanoi’s Eerie Ghost Town – Lideco Bắc 32
Wrap-Up: Chinese ghost cities.
The story is complex, and not all ghost cities are the same. Perhaps some have even become real cities already, and others are neither entirely empty, or entirely thriving. At the other extreme the majority of buildings in other ghost cities have become derelict shells, most likely reducing the value of the land beneath them. In many , many others, the cost of making apartments habitable will unlikely even be justifiable, and still many such apartments represent significant investments by their owners.
Most apartments in ghost cities are complete ghost investments, which like gold sitting a vault, have no current function, but unlike gold in a vault, their value is collapsing.
Clearly China has a problem with the investments of so many private citizens representing a bubble. The government is aware, and seems very focused on avoiding the blowback from the bubble bursting. One concern is that thee government in China could simple delay the burst until there is a global crisis triggered by the war in Ukraine, which would allow for correction as part of a global correction.
Why would China alone have this problem or investing in real estate for future value rather than for returns from its use in providing homes? Chinese people are still people, with the same basic strengths and weakness as anyone else, but culture, and propaganda, does influence people, and exacerbate certain behaviours. Still, as 1.433 billion of the current 7.17 billion(using 2019 data), close to 1 in 5 people in the world lives in China, without even factoring in Chinese people who live elsewhere. Even if the behaviour was someone limited to Chinese people, it would still have a huge impact on other countries.
‘Ghost housing’ beyond China, and the resulting investor debt.
Unoccupied ‘Ghost Housing’ In Australia, US, UK, Canada etc.
The graph to the left, shown on the national broadcasters in Australia caught my attention. Household debt-to-income is a clear indicator of ordinary people becoming highly leveraged investors. Large scale loans that result in debt cannot be obtained on a large scale without asset backing, so a large ratio, means citizens are highly leveraged from investment in assets.
Why would Australia have a significantly higher debt ratio than the other nations listed?
One possible contributing factor, is that Australia may has, on percentage terms, has a higher number of Chinese people than the other nations on the graph. Yes the USA has almost 4x as many overseas Chinese, the USA has 12x the population of Australia. The similar country to Australia not on the list is Canada. So I searched to find the ratio for Canada: 174. Almost identical to Australia!
Despite the correlation, there is no suggestion the debt ratio is driven by Chinese people, as it is Australians and Canadians with the increased borrowings. The suggestion is that the idea is infectious, and greater presence of examples from Chinese investors, encourages developments designed to appeal as ghost housing, which find a market, leading to even great debt to income rations in order to fund real estate investment.
Correlation does not imply causation, but it does lend support to the idea of a connection. Further supporting evidence is that Vancouver went as far as introducing an “Empty Homes Tax” in 2017 to prevent unoccupied “ghost housing”. While the “empty homes tax” does not prevent investment in housing that is entirely focused on future property values, it does make that housing available to people who need somewhere to live.
So what about “ghost housing ” in Australia?
The analysis of the 90,000 unoccupied dwellings across metropolitan Sydney compared the number of empty homes in a suburb against the rate of return investors made by renting out a property.
It found that properties in neighbourhoods with lower rental yields and higher expected capital gains were more likely to be unoccupied.
Gordon-Killara on the north shore had the highest share of vacant apartments, with more than one in six unoccupied on Census night.
Sydney Morning Herald March 27, 2016: Thousands of empty homes adding to Sydney’s housing crisis.
It is clear that some unoccupied “ghost housing” does exist in Canada, Australia and other countries.
Regardless as to whether the idea of leaving housing unoccupied spread from China or not, as identified in the quote above, it does exits in property markets around the world, and potentially to a greater extent in countries with investments by Chinese people.
Although much of the press reporting on ghost housing in Australia and Canada is now some years old, the it has not gone away:
The think tank’s analysis shows the number of vacant or underused properties – defined as those using less than 50 litres of water per day over one year – have increased by 13.3 per cent since 2017.
2020: Melbourne’s 69,000 ‘ghost homes’ add to housing affordability woes
There are similar reports in other cities(Auckland 7% ghost housing 2020), despite the issue getting now getting less attention. So why less attention? Firstly, it is no longer news, secondly, attention is elsewhere as the ghost housing is normally not suitable to solve the problem of as affordable housing, and thirdly, ending ghost housing could trigger a crash in the house values of ordinary citizens with mortgages.
The core appeal of ‘ghost housing’ is capital gain and while the higher household debt to income ratios in Canada and Australia does suggest this unoccupied ghost housing further inflates the price of housing and debt levels, it is only part of the picture.
Hidden ‘Ghost Housing’: Unoccupied Homes are not the full story.
Occupancy and regulations: Masking rather than solving the problem.
Vancouver introducing an empty homes tax discouraged housing remaining unoccupied, but need not solve the problem. Housing developed with price growth as the focus is not necessarily the housing needed to provide people with homes:
Almost 83,000 properties, or 4.8 per cent of Melbourne’s total housing stock, appeared to be unused based on water usage of less than 50 litres a day – including up to 19 per cent of investor-owned property, the December report found.
Sydney Morning Herald March 27, 2016: Thousands of empty homes .
Chris Johnson, the chief executive of developer lobby group the Urban Taskforce, said the Census findings likely reflected the fact that those at the higher end of the market had the luxury of keeping their property empty for part of the time.
“The supply issue is actually about affordability,” he said. “You can well say there are a whole lot of $2 million apartments that aren’t fully used at the moment …but people just don’t have the money to be able to move into that sort of apartment.”
Simple forcing more properties onto the rental market need not solve the problem of housing not being built with rental in mind, as the properties may be in the wrong location, and unsuitable for the needs of those most needing access to housing.
Owner/tenant occupied ‘asset growth housing’.
There may be far more highly debt leveraged housing, focused returns from asset growth rather than on sustainable revenues. Effectively ‘ghost housing’ focused on the same returns, but occupied, either due to legislation, or for the additional revenue. This housing may be compromised by the principles that can result in ghost housing, such as being in the wrong location for occupancy, or with designs that tick investor boxes rather than appeal to occupants, without going so far as resulting in unoccupied homes.
Conceptually, the homes may be less suitable for occupancy, but not to the extend they are left unoccupied. However, if the growth in value of real estate ends, or even stalls, these properties may be unsuitable to ever generate rental income that would come anywhere near servicing debt used to fund initial investment.
Will There Be A Financial Crisis?
A new monopoly game?
Remember the game of monopoly? Derived from the “Landlords game“, rather than convincing people of the danger of monopolies as originally intended, it seems to better show that people don’t mind monopolies as long as there is a chance they can be the minority that wins. Have you ever noticed that rising property values is not even a part of the game?
While today, owning property in many countries is far more centred around rising property prices than rental returns, so if designed today, monopoly would be about rising prices. The game illustrates how the focus was not that way 100 years ago.
The limits of exponential growth.
It may seem that housing prices have always risen faster than inflation, but clearly this is not true. Consider locations with house prices increasing at even 5% per year above the rate of inflation.
At 5% beyond inflation, a house costing $100,000 in todays money working backwards would have cost just below $800 in today’s money back in 1920, or working on US inflation rates, under $55 of money at the time. Go back another century and had prices been rising at the current rate for 200 years it would be well under $1 in today’s money, or below 5c in the money of the time.
At 5% beyond inflation looking forward, means a house costing $100,000 in todays money, would in 100 years cost $12.5 million, and 1.5 billion of todays in 200 years, and that is without adjusting the price up to correct for inflation. If prices rise faster than inflation, then less and less people have the wealth required for a home. By 2220, only 735 billionaires in the US would be wealthy enough for what is today a $100,000 property if all else remains on current trends.
Desperate Steps to prolong growth
From accepting grain or garlic as part payment, to offering live pigs as an incentive to buyers, the unusual sales tactics underline the dire state of China’s vast real estate industry. A collapse in sales has accelerated since developer Evergrande defaulted on its debt last year as the economy has slowed.
CNN 2022, June 22: Wheat down payments and free hogs, How Chinese developers are trying to sell homes
In China, developers are desperate to keep selling developments despite the number of ghost cities, a population no longer rising, and a government trying to limit urbanisation.
In countries like Australia, while governments recognise the growth in housing prices is creating an accommodation affordability crisis, all government action targets assisting buyers to be able to have more debt so that prices can still rise.
The trigger for Financial Crisis.
There is a saying that goes some thing like “if you owe the bank $X, you have a problem, but if you owe the bank 100x $X, they have a problem”. The principle is that when there is no way debt can ever be repaid, the result is a financial crisis like the GFC.
If property values collapse, there is a financial crisis. With ghost housing, values are all based on prices continuing to rise, and exponential growth ends sooner or later. Which means the basis for current prices collapses, so property values must collapse.
The only hope is they collapse so slowly that the banks don’t have a problem. Correct?
Oh, yes, and that the problem is really confined only to the ghost cities of China?
Conclusion: There is a crisis, but not necessarily a crash.
The GFC created the association between ‘crisis’ and ‘crash’, but meaning number #1 of crisis is defined as “A crucial or decisive point or situation, especially a difficult or unstable situation involving an impending change.” A crisis is a problem, but not necessarily without a solution.
Clearly there is a crisis in the China for the ghost cities, which could affect at least the 20% of people in the world who are, at least in part, Chinese. If the problem had not spread, and the mentality of housing designed around prices forever rising above inflation affected other locations, the rest of the world would have nothing to worry about… well, other than it could trigger a war.
Updates.
- 2022 June 22 : Updated to add information on how desperate developers now accept grain as a deposit.