The ‘dark’ secrets of China’s property bubble

Travel to any big Chinese city, and you’ll find row upon row of apartment towers — all immaculately constructed, but seemingly without a single occupant or any signs of habitation.

At nights, their emptiness is even more striking: where you might expect apartment blocks to glitter with lights that establish human occupation, these towers stand as pitch-dark monuments that bear silent testimony to China’s property bubble.

Getting official data on the number of ‘vacant’ apartments is a bit like groping in the dark. The National Bureau of Statistics, the official statistical agency, recently classified the ‘vacancy rate’ in China’s property sector a secret.  But guesstimates, based on proxies for vacancy — such as the lack of power usage — put the number of vacant apartments at over 50 million!

“There are 64.5 million flats in China that have reported no electricity usage for six consecutive months,” China-watcher and author of The Coming Collapse of China Gordon Chang told DNA on Tuesday. “The vacancy rate is close about 25-30% for flats.”

Activists in China have recently launched an enterprising campaign to throw light on and expose the extent of vacant apartments in China’s big cities, including Beijing and Shanghai.

They have begun taking photographs of apartment blocks at nights in big cities, and posting the images on the Internet. However unscientific this campaign may be, these images offer compelling anecdotal evidence of the ‘dark’ side of China’s property bubble.

But property developers in Beijing, who are wary of any talk of a ‘property bubble’ since it could unnerve investor sentiment, drive property prices sharply down and hurt their bottomline, are now one step ahead of the game in their efforts to keep the public in the dark about vacancy rates.

Last week, property managers in Beijing’s apartment blocks were directed to ensure that all vacant apartments have their lights switched on from 7 pm to 10.30 pm — to give the impression that they are occupied. Additionally, they have been directed to ensure that even empty apartments have some decorative elements to suggest human habitation.

Property developers claim that all their apartments in developments — even the seemingly empty ones — have been fully sold out. Economists have a plausible theory to account for why so many apartments are going empty. According to them, in the absence of worthwhile alternative investments in China, Chinese people tend to buy apartments and treat them as a store of value - in the hope of property price appreciation. And since there is no property tax in China, there is no disincentive to holding onto apartments without letting them out on rent.

The Chinese government has taken some administrative measures to drive down property prices, but they have largely proved ineffective. That, says Chang, is because people are not convinced that the government is serious about driving down property prices. “Decrees are issued, but they don’t get enforced.”

Developers continue to build although they have so many vacancies because they believe that the government is going from austerity mode into coming up with another stimulus, he adds.

“The Chinese government is trying to manage its way through the property bubble,” reasons Chang. “But by doing so, it prejudices future growth, prevents reforms from occurring, and does all sorts of bad things.” In his estimation, the Chinese government may succeed in “postponing the consequences,” but it will only create “bigger problems.”

Last week, a government official gave further demonstration that China is — in hedge fund investor Jim Chanos’ words — “on the treadmill to hell”. Chen Huai, the head of the China Urban-Rural Construction and Economic Research Institute, dropped a bombshell when he noted that more than 50 per cent of China’s current residential properties would need to be demolished and rebuilt in the next 20 years. 

It’s left Chinese activists wondering how many more million ‘dark’ apartments will rise in cities across China.