Why is everything in China falling apart?
26 November 2016
Everybody seems to know about China's real estate bubble and brand new
empty cities, but few seem to understand that maintenance is
Build it new, and when it gets "old" (say, 20 years), then tear it down
and rebuild it in grand style. That has been the Chinese mindset since
the Great Transformation launched in 1978 ("To get rich is glorious").
But when real estate development becomes half of the economy, and
literally thousands of highrise buildings have been thrown up, along
with glitzy malls, U.S.-style suburban develpments, grand civic plazas,
etc., then at some point there won't be enough money in the Universe to
tear them all down and rebuild them in a yet grander fashion.
If you have spent some time in China, then you already know building
maintenance is not a priority, a recognized trade or even a concept
which has a toehold in the mindshare of frenzied development and the
pursuit of glorious riches.
Here is the U.S., a similar frenzy of get-rich-quick construction took
hold in the bubble decade 2000-2007, and tens of thousands of
McMansions were tossed together by inexperienced builders and crews.
While the defective Chinese drywall installed in thousands of homes has
recently made headlines, that is merely the tip of the iceberg in terms
of defective, shoddy construction put in place in the go-go housing
Here is a rare bit of unvarnished reporting on China's shoddy
construction, from a China Daily interview with a Big Nose (Westerner)
bigshot in Beijing:
Poor construction quality keeps foreign property buyers away
I think people in China, for obvious reasons, don't often think long term.
People are more worried about things that may happen tomorrow or in the
next two or three years, than they are about what may happen in 50
years. But at some stage in the future, people will start to think more
about the long term.
The quickly built but cheaply made buildings in Beijing will not
literally fall down, but will deteriorate. Wall paint will peel and
elevators won't work.
Buildings will become uncomfortable because they will not have been
properly maintained. That's when people will start to realize they've
paid a lot of money to buy a place in the Central Business District and
they've paid management charges, but nothing works and everything looks
really poor. But the developers will probably be long gone by then, so
I'm not sure what people will do.
Many buildings in Beijing are built with the cheapest materials
available, which tend to degrade quickly. This is a worryingly common
phenomenon. There are many buildings here that appear as if they are 10
or 15 years old, but are really just five years old. That's a little
I have a 75-year-old apartment in New York, but it's still in great
condition. You don't see that here. Fast and cheaply built apartment
complexes dominate the property market here and there will be future
consequences for this. And it might be apartment owners who end up
The apartment owners won't have any money to do so because they make
$8,000 a year and paid $200,000 for their apartment. Here is Jim Chanos
Short-Seller Jim Chanos: Red Flag Over China:
They (China's leadership) are on this treadmill to hell because 50% to
60% of GDP is construction. And if they stop construction, you'll see
GDP growth go negative quickly. That's not going to happen because in
China, people are rewarded at almost every level of government for
making their economic growth numbers. The easiest way to do this: put
up another building. So they're really hooked on this sort of heroin of
real estate development.
The perception seems to be that China will grow out of this situation.
But the problem with that argument is the real estate being built is
not for the masses. This is not affordable housing for the middle
class. This is high-end condos in major urban areas and high-end office
Just to give you an idea, right now construction costs in China are
starting to hit $100 to $150 per square foot in some cities. That
doesn't sound like a lot by Western standards, but it means a
condominium basically presented to you with no floors, no walls, no
appliances costs the average Chinese two-income couple $100,000 to
That Chinese two-income couple in their 30s probably makes combined
$7,000 or $8,000 a year. You do the math. Even if they were making
$10,000 to $15,000 a year, they couldn't carry a $150,000 condo. This
is very similar to someone making $40,000 in the U.S. at the height of
our bubble buying a $600,000 or $800,000 house. We know how that ended.
You get rough concrete walls for your $150,000—no finished walls, no
plumbing except stub-outs, no wiring except the panel box, no interior
walls, and concrete floors. Even in China, where labor is still quite
cheap, constructing your dwelling will cost a lot of money—$50,000 is a
good ballpark number but it would be easy to spend more.
So the apartment costs 25 times the household's gross income. For a
U.S. household making $40,000 a year, that is the equivalent of buying
a $1 million condo.
The folly is always based on the same premise: the government will
never let real estate fall in value. Indeed, a collapse in price is
Unfortunately, the homeowners could build a beautiful, lavishly
appointed home in their new highrise and find that the elevators no
longer work in a few years. There are "homeowners' associations" in
these buildings but the fees are too modest to handle costly repairs
like new roofing, exterior painting or elevator repair.