China has at least 65 million empty homes — enough to house the entire population of France. It offers a glimpse into the country's massive housing market problem.

One-fifth (65 million) of China's homes are empty.
This means that there is enough land available to house all of France's population.

China's sprawling ghost cities are a testament to its dependence on real estate as an engine of economic growth and its faith in it as a safe investment.

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You'll be surprised at what you find if you drive an hour outside of Shanghai and Beijing. They are still high and modern. They are also generally in good condition. They are, however, in a much more peaceful state than their Tier 1 cities.

These are China's "ghost towns."

Their existence is well documented. One example is CBS' 60 Minutes segment about China's ghost cities. It featured Lesley Stahl, a CBS correspondent, on a major road during rush hour with barely any cars in sight.

With Evergrande's $300Billion debt, China's real estate market has been at the forefront of global discussion. Ghost towns have also seen a renewed interest. They are a testimony to China's dependence on real estate as an engine of economic growth and its belief that the sector is a safe investment. However, it's difficult to quantify their exact number.

Li Gan is an economist at Texas A&M University and director of the Survey and Research Center for China Household Finance (Chengdu's Southwestern University of Finance and Economics). He is also a leading expert on China's housing market. He didn't know the number of ghost towns in China when I asked.

He said, "I don’t know if there’s any definition for 'ghost towns'." "So, I don't know how many there are."

What are China's "ghost towns"?

Ordos New Town in Inner Mongolia, also known by Kangbashi as China's most famous ghost town, may be the most well-known.

Insider's Melia Robin previously reported that the city was originally designed to accommodate one million people. However, this number was later reduced to 300,000. It was home to just 100,000 people as of 2016. Kangbashi managed to attract residents after China moved several of its top schools to the city. Nikkei reported earlier in this year that students and their families followed China's lead.

Kai Caemmerer, a photographer, traveled to China in 2015 to photograph ghost cities. The photos show endless rows of high-rises without any sign of human life. These photos might be reminiscent of the images taken in locked-down cities during the pandemic.

These unoccupied units make up a large portion of China's huge housing market. It is twice as big as the US residential market and reached $52 trillion in 2019. The Wall Street Journal reported that 21% of China's 65 million homes had been left vacant in the most recent China Household Finance Survey.

This means that China has enough units left empty to accommodate the entire French population.

China's situation is different from Japan and the US, which have areas where abandoned and decaying homes are occupied and given cities and regions the title of "ghost town". They aren't abandoned, they're just not occupied.

Gan stated that these ghost cities are a "unique China phenomenon".

On February 16, 2017, an empty street was found in Kangbashi, Ordos, Inner Mongolia. Many new buildings of different styles were built but many were abandoned due to insufficient financial support. South China Morning Post / Contributor

How is it possible that China has all of this vacant real estate?

First, it is important to realize that China's ghost towns are not in a state of disrepair. They are filled with new buildings that were purchased as investments. They are also indicative of mismatched demand and supply.

Insider was told by Dr. Xin sun, a senior lecturer on Chinese and East Asian Business at King's College London.

Sun stated that the government receives large sales revenues from leasing land to developers on the demand side. He said, "This gives government a strong incentive to encourage and not limit development."

According to the Economist, 15 million homes are built each year in China, five times more than the US and Europe.

China's rapid urbanization rate is another issue that needs to be addressed. Data from the World Bank show that 61% of China’s population now lives in cities as compared to 35.8% 20 years ago.

Gan stated that there are flaws to China's urbanization rates metrics. One of these flaws is related to reclassified regions. Rural areas that are reclassified to urban status have already been populated with houses. He said that even though they haven't moved and don't need to find a new home, they still contribute towards the urbanization rate.

Gan stated that China underestimated the number of people who would move from rural areas to urban areas. This is part of the problem.

Culture of real-estate investing

Sun stated that the rising trend in house prices has created a huge demand for second- and third-homes.

Sun stated that house prices have increased multiple times in major cities within the past two decades. "Most Chinese have not experienced a significant real-estate bubble burst as the US or Japan experienced in 2008 and the 1990s."

Sun stated that this leads to the strong belief among many people that real estate is the best method to generate and preserve wealth. This stimulates the desire to purchase additional properties.

China has a high level of homeownership. According to a January research paper by the National Center for Biotechnology Information on homeownership in China, more than 90% of households are owners. China's homeownership rate is high: More than 20% own multiple homes. For comparison, the US has a 65% homeownership ratio. China's real-estate portfolio also accounts for a large portion of the country's wealth. 70% of China's household assets are in real estate, which is a far greater percentage than in western countries.

This is however where the mismatch occurs. According to Bernard Aw, Coface's economist in Asia Pacific, demand for units has been affected due to a number of factors. These factors include the unaffordability and aging of the population as well as slowing population growth. Aw pointed out China's 2020 Census, which showed the lowest population growth rate since the 1970s.

Gan stated, "They created an oversupply and then sold it." "And that's how you see the vacancies."

Few people live in residential buildings in Kangbashi, Ordos, Inner Mongolia on February 16, 2017. South China Morning Post / Contributor

China can mitigate the Evergrande crisis, including stopping home sales.

According to Evergrande's website, there are more than 1,300 Evergrande developments in 280 cities across China. These properties collectively house over 12 million people. Matthew Loh, Insider's reporter, recently stated that Evergrande properties house more people than entire countries like Greece, Portugal, and Sweden.

Evergrande has $300 billion of debt making it the largest company in debt. It has 1.6 million undeliverable apartments and keeps missing its bond payments.

Despite Evergrande's debt and scale, China's housing problems are only a fraction of Evergrande's. Gan stated that Evergrande is a factor in China's vacancy problem. However, they can be blamed for it. Their market share in China remains small.

Gan said, "They're both part a big problem," pointing out Evergrande as well as the vacancy rate.

A drone captures an aerial view of the Evergrande city in Wuhan, Hubei Province. Getty Images

Bloomberg described Beijing's nightmare scenario in 2017 as one where people sell their second properties in an attempt to avoid cracks in the market, sending prices down. Gan said that this scenario is not currently occurring in China but that it was not because there aren’t any cracks in China's market.

Gan stated that instead, the government makes it so difficult for homeowners to sell, Gan claimed.

"China can stop a transaction. The government has the power to change how long you can own your home. Gan stated that if the prices are too low, government will not issue a certificate de sale. That is exactly what is happening right now.

He said, "You won’t see the price drop significantly, but you will notice the transaction volume drop tremendously." They'll stop the sales. They can stop the appearance of a huge price drop by doing this. They can stop the crash."

Gan stated that this very move of reducing home sales will hurt those who have to sell their homes in order to get cash. He said that real estate represents a large chunk of people's wealth. The liquidity sellers will be hurt if they have to sell their wealth for education, health, or retirement.

Gan said that the stoppage of sales was not directly or solely linked to Evergrande’s debt crisis. "This was happening prior to Evergrande became apparent."

Increasing contagion fear

Experts said that households with only one home are at greatest risk of liquidity sellers.

People who own one home are at risk because they have low income and high prices. Gan stated that many of these people borrow from their friends and relatives, not banks, to pay down their down payment.

Sun stated that it is a different story for wealthy families who have money invested in second or third properties. "The risk of default for such families is relatively low, unless there is a massive, unprecedented economic crises leading to massive unemployment."

Sun said, "But aside from the worst-case scenario," Sun stated.

Evergrande is a risk to the whole Chinese economy on a larger scale. Experts believe Evergrande's debt problems may affect other Chinese property developers and create a new wave of defaults. Fantasia, a Chinese property developer, missed the $206 million deadline. Reuters also reported that a September 2020 letter leaked by Fantasia shows the company's debts to at least 128 banks.

Sun stated that China may perceive Evergrande as a risky investment and the Evergrande crisis is a sign of this. A weakening trust, which accounts for 29% of China's GDP could cause shockwaves in the Chinese economy.

"The government depends heavily on the households investing in real estate. Sun stated that a burst bubble will invariably affect people's confidence in real property and their perception of realty as the best way for them to generate and preserve wealth. "This means that a slowdown of real estate sales will lead to a decline in economic growth and government financing."


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