China Real Estate Bust

First a link to an interesting article about the Olympic bust of real estate in Beijing (and China as a whole.) 

Inside the article comes some amazing information along with some competing ideas. First some facts:

Beijing went through a building boom before the 2008 Summer Olympics that filled a staid communist capital with angular architectural feats that grace the covers of glossy design magazines.

...

By Rodman's calculations, 500 million square feet of commercial real estate has been developed in Beijing since 2006, more than all the office space in Manhattan. And that doesn't include huge projects developed by the government. He says 100 million square feet of office space is vacant -- a 14-year supply if it filled up at the same rate as in the best years, 2004 through '06, when about 7 million square feet a year was leased.

So what cause this boom & bust? The market with its usual boom & bust cycle? The Olympic fever infecting everyone in China? The government? Or some combination of the above?

What makes this boom-and-bust cycle different from those in the West is that there is no private ownership of land in China, making local governments de facto partners in the real estate industry, which earn huge fees from leasing and transferring land.

Huang Yasheng, an economist at the Massachusetts Institute of Technology, traces the blame for the bust to the Chinese Communist Party and its reluctance to allow a true market economy.

"The lack of land reform fed into the real estate bubble and now it's coming back to haunt them," said Huang, author of "Capitalism With Chinese Characteristics," published last year. "There should have been more checks and balances on the ability of the government to acquire land."

Okay - that's a vote for government distortion, as they stand to gain from being partners, but it assumes there still were enough private investors to go along with the boom that led to the bust. Those are fairly natural in the real estate market, but if government officials act as promoters of land, for their own gain, it can only add fuel to the fire.

The government spent $43 billion for the Olympics, nearly three times as much as any other host city. But many of the venues proved too big, too expensive and more photogenic than practical.

The National Stadium, known as the Bird's Nest, has only one event scheduled for this year: a performance of the opera "Turandot" on Aug. 8, the one-year anniversary of the Olympic opening ceremony. China's leading soccer club backed out of a deal to play there, saying it would be an embarrassment to use a 91,000-seat stadium for games that ordinarily attract only 10,000 spectators.

The venue, which costs $9 million a year to maintain, is expected to be turned into a shopping mall in several years, its owners announced last month.

Now, that is pure government. 43 billion dollars of infrastructure to be torn down and made into shopping malls.

Louis Kuijs, a senior economist at the World Bank in Beijing, said a lack of government supervision of the real estate industry tempted developers to build only for the luxury market and to ignore the mass market.

"If you think demand is endless for anything you build and you have just 200 square meters of land, you will build high-end apartments to make the highest profit," Kuijs said.

So, the government who built 43 billion dollars of infrastructure now being torn down is going to regulate the market and do a better job than people risking their own money, especially when officials are making cash with each deal for themselves. Riiiight. Oh wait, the next paragraph explains that the government did step in:

To its credit, the government recognized in 2007 that the real estate market was headed toward a bubble, economists say. In an attempt to make real estate more affordable, restrictions were introduced on ownership of second homes and on foreign home buyers. But the measures came too late, accelerating the crash of an already weakening market.

Huh? I though increased regulation would cure the problem, but its saying here that it accelerated the crash of a market already weakening on its own. Are we seriously going to think that if people risking their own money make errors of investing in the wrong products, that the Chinese government in 2004 or so, would have been able to stop the madness? 

Maybe...but from the US example, seems more likely they will now attempt to prevent the market from clearing at lower prices and prop construction companies and real estate developers up instead. I bet they are now offering deals for foreign buyers or those wanting to buy second homes - villain speculators one moment, heroic investors the next.

Seems to me a better way to avoid the bust may have been to get the government out of the land ownership game. If the officials did not make any money off land deals,then private investors would have less of a supply of cheap land. Often in China, companies can get land "for free" if their project is deemed important enough.

Final note: I guess North Korea's infamous Ryugyong Hotel has lots of free market company now. Go Juche!