My body and I have drawn two conclusions from a couple of weeks of traveling through southwest China and eating copious amounts of tongue-numbingly spicy food: China’s public bathrooms have (very marginally) improved, but the urban planning has not. (I had a lot of time to think about urban planning while utilizing those public bathrooms, due to the aforementioned spicy food). Provincial capitals like Kunming and Changsha were expansive last time I visited a few years ago; the cities have only grown larger since, sprawling further and further from what used to be the city center. Thirty-story apartment buildings sit stacked in neat rows, stretching for miles in every direction, as though they were stamped there by a bureaucrat over-using the copy-paste function on his computer. Huge new tracts of former farmland on the outskirts of the city have been razed and flattened in preparation for further expansion. It takes an hour to drive from one side of the city to the other not because of bad traffic but because there are tens of millions of housing units, spaced far apart, that take up an incredible amount of physical space. It should be obvious to any observer that these cities have way more housing units than people. People may be living in houses in the city center, or they may be living in houses on the outskirts of town, but they can’t be living in both.

For a number of years, fears of a Chinese housing bubble rested on “ghost cities”: brand-new cities, built on local government debt and backroom deals, rising from nothing in the middle of nowhere and devoid of people. Developers were building with no regard for demand, so apartment blocks would sit unbought, unwanted, and slowly crumbling into oblivion. Excess housing stock is a problem in some places, but it pales in comparison to a related, and possibly more sinister issue. Vacant homes sit empty, but they have already been purchased as a second, third, or fourth home. Unwanted and unused are not synonyms in a country with no property taxes, an economy driven by real estate, negative real returns on regular bank deposits, and a volatile stock market.

Housing demand is insatiable not because people want to live in houses, but because they want to own houses. As I wrote about last year in Hebei (the New Jersey of China, if you will), even working class families purchase multiple houses. (If you trust the advice of a real estate company’s blog, a single family should buy six homes to feel financially stable: one to live in, one for each set of parents to live in, two for their children’s future use, and one to rent out.) Up to 25 percent of all housing in China is owned but not occupied as of 2015, a rate far higher than in other countries around the world. In China, housing is simply money that you can sometimes live in. There is no tax on holding property, so unused housing can sit there and increase in value. When you earn more money, you want to store it away in a place that is relatively safe and will earn high rates of return, which it seems, in China, means buying houses that nobody lives in but might come in handy later when your children can’t afford to buy one or you need to get a lump sum of cash to send your child to school in the United States.

We tend to think of bank deposits as safe and real estate investment as risky. Such a view, however, is built on the premise that the government will protect our money and that in the long term, interest rates will gradually create a small but stable return. Neither of those is obvious in China. Without much political trust in the banking system (controlled and operated by the state), why would a citizen choose to put their money in an invisible, liquid asset rather than an actual tower of concrete and steel? A fixed asset is more reliable in the minds of many Chinese citizens because it literally cannot be moved or disappeared with one stroke of a pen. After decades of real estate investment, from officials with hundreds of off-the-books apartments to single families saving up to buy a second or third home so their children can be socially eligible to marry, enough people’s assets are in the form of housing that housing has become a de facto banking system.

With so many people’s wealth tied up in the housing market, the ultimate fear is that housing prices will decline. If housing is a bank, allowing housing prices to drop is equivalent to banks losing money and all of their customers taking a hit. It would presage deflationary pressure and financial instability, if not a crisis, for housing prices to take a hit, so the government has to implicitly guarantee that they will not decline. The policy options for corralling an overheated market are somewhat constrained by the simple fact that allowing housing prices to decline, even if they are wildly overvalued, would presage large-scale financial instability. And if you haven’t heard by now, the Chinese government is not a big fan of instability, nor are they looking for massive deflation. Continue reading →