THE GHOST CITIES OF CHINA - Shreya Dutta

 

China has approximately 687 cities, and the real-estate sector accounts for a staggering 30% of the country's total GDP. For decades, this has allowed the country to maintain rapid economic growth, and the ghost cities are evidence of China's reliance on real estate to fuel growth. However, with Evergrande's $300 billion debt looming large, China's real-estate market has faced the brunt. 

 

Reasons for the Boom in the real estate sector of China

Real estate was once a sector considered safe and profitable to invest in China. Even the Chinese government encouraged investment in real estate. The property market, more or less constantly rising in price, had been a significant driver of increasing wealth and household income in the country for decades.

On the supply side, the government earns significant income from leasing land to developers, as according to China's constitution, all land in China belongs to the state.

Investment property speculation is also the reason why property ownership in China accounts for a large portion of total household wealth.

 

How did China’s once flourishing real estate sector become so stagnant?

In 1970, people in China thrived mainly on agriculture. However, as the country embarked on an industrial momentum, opportunities began to emerge in certain areas. They leased state land to private developers, who immediately began to take advantage of it. People used to own homes to support their families, but soaring real estate prices have created a new market for speculators — people who keep buying homes hoping that prices will continue to rise.

 

So what led to China becoming a land of ghost cities? A bubble in China's housing market sent property prices skyrocketing and developers rushing to build more units. However, several factors, including rising house prices, an ageing population and slowing population growth, have reduced demand for units.

 

 

According to recent reports, about 20% of all urban housing in China (about 65 million) are vacant. About 100 million properties have been purchased but are likely unused and could accommodate about 260 million people. Such Chinese "ghost cities" are not run-down cities; instead they have well-connected roads, infrastructure, skyscrapers, and various public spaces, but they are severely underpopulated, with vast areas completely dilapidated. There is also the problem of unfinished projects even though there is demand. Most new properties in China (about 90%) are sold before completion, and a developer's setback could have a direct impact on buyers.

 

 

Evergrande Crisis

Evergrande is one of China's two leading real estate companies. The Chinese government has also created an easy financing option for this. The company, in turn, has relied on cheap debt to assemble plots of land across the country.

 

Evergrande's strategy worked as long as it could be built and sold at a relentless speed. The company rented the land, bought the land, had the homeowner buy the plan, and then rented it again to start another project. Behind the rapid growth was a hefty rise in interest rates.

 

 

These vacant homes represent a sizable portion of China's vast housing market, twice the size of the US housing market. China's government has already ordered local governments to prepare for what could happen after the Evergrande collapse, but China's property sales are slowing despite a brief post-pandemic recovery. The issue has revealed a huge gap between demand and supply in China's housing market.

 

 

Impact on China

The pandemic may have displaced urban settlers, but not for ghost towns. As people rethink work opportunities and lifestyles with families in mind, this shift could contribute to the growth of some second- and third-tier functional cities, but essentially, There is no need to transform an impracticable town into a city.

Instead of building an entire city without considering who will live in it, economic planning and a phased approach is required to gradually expand the community. It's a process that takes decades to plan and execute. These frameworks are currently being seen in urban mega projects in China, such as Xiongan New Area. However, this success has to be explained by the fact that the government has complete control over the city's real estate market.For many ghost towns, structured, holistic renovation not only improves living conditions but also helps preserve the value of the homes.

The Chinese government has the power to step in and artificially raise prices if they drop overnight. Governments can change the number of years a home must be owned. The government will not issue a sales certificate if the price is high. At least there exists some control over the outcome, but for how long? Perhaps China's cityscape may amaze the world in the years to come.