I once read a Citibank's report on China's real estate market that might give insights to the answer to that. The report is lengthy, as it addresses many questions, but the core argument for the craziness in China's real estate market is that it is the most common form of (long-term) investment in China, and the government is the biggest beneficiary of it.
Basically, if you look at an asset breakdown of personal wealth, real estate will account for 65% of all investments in China, while in other countries like the US or in the EU, that number is close to 20% (source: World Bank & Citibank's Investment Research and Analysis). Other than that, because of a reform on the tax sharing mechanism (in 1994), local governments are highly dependent on the real estate market, as 40-55% of their direct income comes from land sales and property-related taxes. That gives the government a very high incentive to keep property prices up and the real estate market booming.
I can email the report to anyone interested in it (sorry, can't just upload to the public here, I worked at Citibank once, could get me into trouble), just send an email to me (rafaelcamera@gmail.com) and remember to put HN on the subject.
> That gives the government a very high incentive to keep property prices up and the real estate market booming
Note, the central government doesn't want high prices, but the Chinese government is not entirely monolithic. "Heaven is high, and the Emperor is far away", is a common Chinese saying - people bend the rules when they can get away with it.
But yes, local governments get a lot of their revenue from land scales. If they are anything like Western local governments, they also get most of their bribes from developments (there are opportunities for zoning bribes, development approval bribes, building inspection bribes, waste disposal bribes, infrastructure connection bribes, and so on, depending on how corrupt they are).
I've just finished reading Boomerang by Michael Lewis and that huge concentration of assets in real estate sounds awfully like Ireland before the crash of 2008 - on a tiny scale compared to China, of course.
Do you think that is valid comparison? (NB In many ways I hope it isn't as a crash like Ireland's on the scale of China would presumably be disastrous).
One difference between the Irish and Chinese housing markets is that in Ireland the gains were from Irish selling to other Irish, in ever increasing sales prices and volume - flipping in it's purest form. In contrast, the Chinese appear to buy and hold their real estate as long-term investments.
You can also see that with their investments in Australian real estate (where I now live). A lot of the apartments now being built are investment properties for Chinese buyers. In a lot of cases, the building is nearly sold out even before construction begins!
I wonder what effect the buildup of presumably unused, stagnant real estate inventory will have on markets like Australia's. I would imagine a pricing bubble, followed by a massive crash -- the extent of whose damages depends on the extent to which the real estate has been derived, repackaged, and traded with other financial institutions.
An oddly familiar pattern, and one that should give us pause.
(Sorry for the delay - I never think to check comments for replies.) In this case, the apartments do seem to be occupied. But Australia has had a housing bubble for some time IMHO. Government policies like negative gearing (tax write-offs for investors where rent doesn't cover the mortgage - who thinks of these things?!), 1st time buyers grants, stamp duty concessions, etc have kept prices from falling.
Sydney in particular has a very tight housing market due to lots of people moving in but not nearly enough apartments and houses being built. This has kept prices up, but there will have to be a drop at some point. The only question is when, not if, and how much.
"In a lot of cases, the building is nearly sold out even before construction begins!"
That sounds quite ominous - reminiscent of the property bubble here in the UK prior to 2008 (which was completely insane, but very tame compared to Ireland).
Rental markets are still strong for landlords. Too many people wanting a place to live, and not enough stock to fulfil the demands. The local governments are speeding up the permit process, but it's going to take a long time to catch up. Plus public transit isn't the greatest, especially in the high growth areas (Inner West and further out). The politicians are not looking long-term and thus screwing the people closest to Sydney out of an easier commute.
Luckily I don't work in the Sydney CBD, so my commute is pretty easy. :)
Basically, if you look at an asset breakdown of personal wealth, real estate will account for 65% of all investments in China, while in other countries like the US or in the EU, that number is close to 20% (source: World Bank & Citibank's Investment Research and Analysis). Other than that, because of a reform on the tax sharing mechanism (in 1994), local governments are highly dependent on the real estate market, as 40-55% of their direct income comes from land sales and property-related taxes. That gives the government a very high incentive to keep property prices up and the real estate market booming.
I can email the report to anyone interested in it (sorry, can't just upload to the public here, I worked at Citibank once, could get me into trouble), just send an email to me (rafaelcamera@gmail.com) and remember to put HN on the subject.