China Will End The Real Estate Game
The rise of Chinese manufacturing is what made your real estate profitable in the first place.
I was born in 1961. In the mid 1960s we lived in an apartment building around 100th Street in Manhattan. One day some kids knocked on the door asking for water. As my mother went to the kitchen they ran in, stole her purse, and bolted.
So, my parents went through the humiliating 1960s mortgage application process and bought a home in Staten Island. It was a POS, but hey, kids didn’t wander the floors stealing purses.
Of course, I was too young at the time to understand anything about real estate; however I doubt renting houses was as common back then as it is today. If you wanted to get away from gritty apartment life in the city, you had to buy a home.
I never heard anyone talk about homes as investments until I was well into my 30s. Buying a home was simply a matter of wages and connections.
I bring up this history because the importance of real estate is not constant. When I was a child, houses were just a place to live.
Today, real estate is more than just a home. It’s an investment that appreciates (though it may dip from time to time). People want to generally own as much of it as possible. Many of my friends and family own more real estate than they live in. Now that all real estate is easy to rent they believe the property can always produce income.
What changed in the 2000s? I believe it’s naïve to assume banks just got friendlier.
In the 1970s the plumbing, electric, appliances and the building materials used in real estate construction were manufactured by fellow Americans who operated under the same laws, taxes and real estate market you were in.
When consumers and manufacturers both live in the same market it’s difficult for either to take advantage of the other. For most of history, and most of the world, inherited wealth dominates who lives where. I believe we’re headed back.
Of course, over time things change for some. Many dream they’ll be lucky or exceptional. The best fortune is going from rags to riches in a month. Consider how many movies made pre 2000s told the story of a young person ending up married to a rich person who hid their wealth?
In the early 2000s, China became the largest exporter of goods to the United States. As a poor nation with almost non-existent labor laws and business regulations, it was easy for certain Chinese business people, connected to the Chinese Communist Party (CCP) to manufacture plumbing, electric, appliances and the building materials significantly cheaper than U.S. businesses.
Couple that with efficient shipping and the great global real estate game was on! Cheap Chinese goods, advanced information technology, favorable demographics, geopolitical peace, plus aggressive banking — all made for a perfect storm in global housing growth (Thank you China!).
Eventually, those Chinese factory owners would use their profits to buy real estate in the wealthy Western cities (never in communities of the American factories they replaced). They’d send their children to study and live in NYC, LA, Boston, etc.
For the past 10 years the game simplified. Investors buy desirable land in a desirable city and build the tallest building they can to maximize the investment’s location value and economies of scale in mostly Chinese materials.
It isn’t just new homes. Old homes benefitted from rehabs using cheaper Chinese furnaces, vinyl siding, laminate flooring, etc. Look around you, how much of the contents of your home, from your garden hose to flat-screen TV were partially made or assembled in China?
After a few years, why wouldn’t the Chinese worker want the same as the American worker — real estate? They did and they do. However, the Chinese real estate market is different from the U.S. in that most real estate investment goes into new housing; that is, all old housing is torn down and new developments built in their place.
The Chinese dream isn’t just some old home down the road — it’s a brand new unit with new appliances!
Once Chinese factories saturated the Western markets they started producing for domestic consumption. The Chinese, never having experienced a financial depression, coupled with the CCP’s belief that voters won’t pressure them to do stupid things, the CCP naturally did a VERY STUPID thing.
The CCP allowed Chinese cities and developers to sell real estate that isn’t finished yet.
And so we have the beginning of the end.
When the global markets began to cool — and then nose-dived from the pandemic — the developers couldn’t borrow additional funds to keep building. They simply stopped building. It’s estimated there are at least one million Chinese people, today, who made deposits, and took out mortgages, on real estate projects that will never get finished.
I expect the number of bankrupted Chinese will jump exponentially when the CCP can no longer prop up China’s heavily indebted cities and developers. The second shoe to drop are the Chinese homeowners who feel safe, who own finished properties. What happens when they find their mortgages under-water?
It’s just a matter of time.
Will Chinese workers then go back to work, manufacturing cheap building materials for the West? No, because they no longer have an economic incentive to do so. It’s no longer 2000 where a Chinese factory manager could offer higher pay to a Chinese peasant.
Those peasants are now struggling to hold onto their new middle-class life. Stuck with worsening debt, they will become the Chinese version of Trump supporters — however that anger and bitterness shakes out.
In conclusion, large amounts of real estate will end up abandoned in the following decades as the cost of materials and labor increases because the Chinese factory boom is a once-in-a-lifetime event that I don’t see being repeated in my lifetime.
The China miracle is over. The West will not escape those consequences. No one will.
