View: 112013-BNB-November.pdf

2

Boom & Bust

These numbers exeed the house-price ratio

of all the major cities in the world. Hong Kong

is at 17. Singapore is at 26 times, Mumbai at

19 times and London, now the most expensive

city of the developed countries, is at 15 times

income. Why? It is a major financial center

where 70% of downtown buying is conducted

by foreigners. This exceeds even New York City,

where foreign buying hovers around 50% and

the average home price is approximately nine

times income.

Elsewhere, Vancouver is near 11 and Sydney

is near nine (higher in other surveys I have seen).

Will these buyers still be around in the wake of

another major global slowdown?

But it gets worse. China’s real estate bubble is

far larger than any other emerging or developed

country. Moreover, it has occurred despite mas

-

sive vacancies (24% on average by surveys of

electricity use) and the famous ghost cities, like

Ordos.

As I have covered in the past, Ordos is in the

central part of the country, closer to Mongolia

and near China’s mining areas. It was constructed

to accommodate one million people, yet it has

only 70,000 residents. Let’s put that in perspec

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tive. We’re talking about a city approximately the

size of San Jose that is 93% vacant! And this isn’t

the only one. Lanzhou is being constructed just

500 miles south of Ordos, Tianduncheng (meant

to look like Paris, complete with a replica of the

Eiffel Tower) stands totally empty inland, and

Chengdu’s New Century Global Center (the larg

-

est mall and building complex in the world) is

almost completely vacant.

So that brings me to the most important topic

of this time, and possibly this century: China’s

unprecedented real estate bubble. The following

chart shows home-price ratios to incomes in ma

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jor emerging markets and developed-country cit

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ies around the world.

Global Home-Price-to-Income Ratios

Shenzhen

Beijing

Guangzhou

Shanghai

Singapore

Bangcock

Mumbai

Hong Kong

London

Vancouver

Sydney

NYC

Data source: Numbeo.com, 2013

0

10

20

30

40

No Deed, No Sex

Since 2001, China has been building houses

at a much higher rate than households have been

formed. At the top of the last bubble (2005 to

2008), China was building five million homes

a year even though average annual household

formation was just 2.6 million. Instead of scal

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ing back, the Chinese went in the complete op

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posite direction, so that in 2011 there were 19

million housing starts but only 5.8 million new

households. That means nearly 70% of the new

homes constructed that year alone are completely

unnecessary!

So how does China keep building houses, con

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dos, offices and malls for no one? The answer:

through a non-stop flow of consumer and govern

-

ment investment. In the second quarter of 2012,

53% of home purchases were for investment.

Chinese investors just let these condos sit

and assume they will keep appreciating, as the

country lumbers through the greatest real-estate

bubble in history. And everyone assumes that

the government will simply not let the real estate

bubble burst.

Oh, that was what I was told in Dubai in 2007

when I was calculating 30% to 40% annual in

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creases in condo prices, double that of the bubble in

Miami. I told everyone there that this was a bubble

about to burst. And they said: “You don’t under

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