This is What a Bubble Looks Like
Two years ago, I appeared in a TV report by Al Jazeera’s China correspondent Melissa Chan about the “ghost city” of Ordos, Inner Mongolia, which illustrated — in extreme form — my somewhat eccentric hypothesis that the Chinese real estate market was being driven by the willingness of investors to buy and hold empty villas and condos indefinitely as a “store of value,” like gold, an unproductive but supposedly safe place to stash their cash. Her report inspired a steady stream of journalists to make the pilgrimage out to Ordos, and helped turn my “store of value” explanation into a stock part of the discussion about China’s ongoing real estate boom.
Last week, Melissa returned to Ordos to see what, if anything, had changed, and asked me to comment and help make sense of what she had seen. You can watch the segment by clicking here. Suffice it to say, Ordos remains largely empty, and construction continues — although there’s a growing nervousness about how long it can last. As I’ve frequently said, demand in China for real estate as an unproductive “store of value” may be extremely persistent, but that doesn’t mean it’s sustainable. And the longer it persists, the more worrisome the overhang becomes.
After you’re done with that, check out this recent TV report by Steve Engle at Bloomberg, about the debt-funded building binge that’s taken place in just one relatively obscure city in Hunan. Note the guy being interviewed about halfway through who talks about all the high-rise condos that have been built and what the occupancy rates are. Steve’s segment is actually a companion to a Bloomberg investigative piece about local government debt that I’ve mentioned before as a must-read.
Then take a look at this Bloomberg segment, from earlier this year (January 2011), about China’s largest mall, which is standing almost entirely empty. You may find it interesting to compare it with this Bloomberg article, about the very same property, written in April 2007 — empty then, still empty now. As the later report states, the original developer went bust and then Peking University bought it, and now doesn’t know what to do with it. The real gem comes at the very end:
Reporter: Despite obvious problems, the malls owners plan to expand.
Mall Manager: We’ve been trying hard to make money, and we’re actually heading towards that direction. We still have some 200,000 square meters soon to be developed. I think we’ll balance out as soon as those 200,000 square meters are open.
Ah yes, we’re losing money on each unit we sell — but we’ll make it up on volume! The solution, as always, is to keep building.
[UPDATE: Melissa Chan has posted some of her own thoughts about her latest report, along with the video, on the Al Jazeera blog, which you can read here.]
[The photo above, of a housing development in Ordos, was taken by Michael Christopher Brown, a photographer based here in Beijing, as part of a story for TIME Magazine, and is republished with his permission. You can check out his work — including more photos of Ordos — at his website, www.mcbphotos.com]