Eighty Million Empty Homes

Very, very conservatively speaking ...

China has roughly a billion households. An extremely conservative estimate cited in this China Update just past the four minute mark counts 32 million unsold homes and another 49 million that are owned by investors and sitting empty. The other end of the estimate scale is a whole order of magnitude away from this - former government statistics bureau head claims the entire population of China could fit in the unoccupied properties.

The United States subprime crisis in 2008 involved a 3% to 5% overstock. China has a 3% unsold stock, a 5% unoccupied investment stock, and those are perhaps politically acceptable estimates because outright denying the problem, which would be the norm for the Chinese government, is simply implausible. The prior low estimate I heard, from the habitually sober Bloomberg, was that there were a hundred million idle housing units. The truth is no doubt higher, but it is concealed by many forces.

China fears capital flight, so the primary outlet for personal savings is real estate. The combination of the One Child policy and this attempt at profiting globally while only saving locally has created a deflationary environment. Central banks can administer highly unpopular medicine in the face of inflation. When presented with deflation and demand destruction the thirty year stagnation of Japan is the only model we have.

Japan was 1) a democracy that 2) engaged in a mixture of consumption and market driven export 3) rather than China’s centralized investment driven economy, and they encountered their demographic nadir 4) well before everyone else and 5) well before climate change made itself felt. Their capital was free to roam globally and what is happening to China now played out in the comparatively much larger U.S. and European property markets in the eighties and nineties, again well before climate change became an undeniable force.

A few days ago in China’s Deadbeat Local Governments we learned that municipalities have unpaid bills equal to 10% of China’s GDP. The municipal revenue model is based on land sales, not the property tax method typical elsewhere. Should they be forced to change to a property valuation revenue model rather than an unworkable eternal growth scheme, the cities begin to recover, but the unsold properties shift from being illiquid assets to liabilities. And this utterly crushes the personal savings mechanism that was allowed to the populace.

Suddenly problems here in the U.S. seems a little less daunting …