Only “partly” true. Demand for real estate as housing *is* driving construction. It gets crowded out some when speculation drives up prices forcing those who want new houses for living to save even more just to keep up with price inflation. Meanwhile those buying multiple houses
Are indeed buying partly to acquire investment assets, but that doesn’t mean they keep houses empty. They are also buying for their kids, their parents, or other family members, especially if one member in a family has favorable hukou as starting point to pull other families in.
In this way buying multiple properties acts as a two for one method to improve a whole family’s economic circumstances, both by pulling families into better geographies and by giving them a hard asset that grants long term wealth security. It’s why property is so desirable.
*BUT* this is also why in places where prices are *highest* vacancy rates are *lowest*. This phenomena is inconsistent with thesis that rich are buying up property and keeping them empty. In rich regions property is very productive *despite* high rates of multiple home ownership.
In short the empty apartments are not the same apartments as the second and third home purchases by the upper and upper middle class! The actual empty apartments are all in lower tier cities, where real estate development has gotten *ahead* of industrial development,
So local incomes have trouble affording prices developers set for new property. Developers have shareholders and investors who expect certain profit margins, so they can’t easily lower prices, and hesitance for households to take on debt is *most* prevalent in poorer communities,
Which results in a situation where there is in fact demand for new property but ROI imperatives on the developer’s part and capacity to pay on buyers part are mismatched, creating a market failure that prevents clearance of vacant new developments. *This* is the actual problem.
And a big reason why this has happened is *because* real estate has been so profitable in the parts of China that developed first, it draws in herding behavior with investors who have treated real estate as guaranteed high returns, crowding out capital for industrial development
In the lower tier parts of China that haven’t yet developed as much. Which *then* creates feedback effect where lack of investment in industrial development outside of real estate leads to lower local incomes, which forces more savings behavior, which suppresses consumption,
Which then contributes more to weak local development, which ultimately means local incomes can’t keep up with real estate costs once developer ROIs and principal cost of debt from high investor crowd in is factored in. *This* is the capital misallocation story in China.
It’s shareholder and investor speculation built on expectations that lower tiers will eventually be able to afford property at convergent prices to higher tiers crowding out capital allocation for the industrial development in lower tier cities that would be needed
For lower tier residents to actually afford property at price to match those expectations. If prices fall in lower tiers where most vacancies are, the market would clear, *but* it would be at huge loss for developers and investors who pulled in massive debts on high expectations,
Which is *not* an option for firms or investors whose most fundamental interest (unsurprisingly) is to stay alive and prosper, not to help clear the market, which is why they’ve been stubbornly trying to hold out for bailouts. We’re at the stage now though where even as firms
Are trying to lower prices just to clear market to pay off debts, potential buyers now expect further drops and don’t want to be shortchanged so they are holding out, which puts even more pressure on ability for developers and investors to service debts, causing greater losses.
But once prices fall enough to converge on local ability to pay empty lots will clear. *This* is the imbalance in China’s economy that needs “rebalancing”. It’s overstretched real estate expectations for lower tiers interacting with regional inequality and local savings behavior.
Getting story right about Chinese real estate is important because it changes assessment of adjustments and future prognosis. Real estate debts will be financial drag on future growth, but high real estate prices are *also* present productivity drag on financial efficiency.
Empty property turning into white elephants is a very different outcome from empty apartments that are temporally dislocated from demand by price. One situation is a total loss, while the other will have offset benefits. The former might recommend pullback on future investment,
But the latter may indicate need to sustain high investment intensity, but with deliberate reallocation from real estate to emphasize more diversified industries, and from rich regions with well developed industries to poor regions that still need industrial development.
This doesn’t mean that there isn’t need for broad economic correction, or that correction won’t be painful, or that there aren’t potential for traps and failures in correction process, but it does mean effective remedy and ultimate outcomes may not work the way some predict.
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