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Short (?) intro for those who don't know how it works in CN: 1. Local govts are in heavy debt and sell land to pay back their debt. 2. Real estate corps pay a

• sbierwagen 4y ago
  >get it paid back in the NEXT 30 YEARS Why emphasize that? 30 year mortgages are common in the US. At current rates of 5.5%, the total paid in interest will be bigger than the original loan. Of course, most US mortgages are taken out on housing units that actually exist.
  • ganyu 4y ago
    What's the household leverage ratio there in US? That in CN is 72% in 22Q1, and even bigger in big cities. Edit: CN definition: (household leverage ratio) = (mortgages paid in 22Q1) / (total disposable income in 22Q1)
    • HPsquared 4y ago
      What ratio is that measuring, loan-to-value or loan-to-income? In the UK at least, a buyer can borrow up to 95% of the home's value and I think 4 or 4.5x the borrower's annual income.
    • ganyu 4y ago
      +HPSquared For total value it's up to 80%, and when comparing to income you can borrow up to 50% of the (before tax) monthly income, for up to 30 years.
  • kevinventullo 4y ago
    I agree with you, and just wanted to add that saying one pays “more” in interest than the original loan value is implicitly ignoring the time value of money, in particular equating 2022 currency with 2052 currency.
    • jollybean 4y ago
      That's a valid point, but it's not hugely relevant to the situation, as all loans come with interest payments and loans over 30 years at ~6% or whatever will accumulate a lot of interest. It's something to talk about, but another thing altogether. The mechanics of this are a bit scary, I wonder how much real data there is on it. Paradoxically, if it were the US, it would be so bad it may wipe out the nation. But Xi has the Central Banks politicized fully ... he can make currency worth whatever he wants. He has to reallocate/rebalance without causing a revolution. And if it does get bad, they may try to start a war as a distraction. That sounds extremely cynical but it's a real thing that happens.
      • imtringued 4y ago
        Isn't it odd that money rules governments? It almost as if the government is just a lapdog for someone else.
        • krsrhe 4y ago
  • ganyu 4y ago
    30 years are pretty common, but paying for some property that never came out of the blueprint (and seemingly never will) does sound a bit odd..
    • dirtyid 4y ago
      Preconstruction sells at 30% discount, people gamble with their life savings considering PRC housing prices to income, but flip side is also massive speculative profit if things work out.
      • civilized 4y ago
        Ah, so this is just crypto and ICOs. But at least you get rights to real physical property instead of virtual Pokemon cards.
        • chaostheory 4y ago
          Well, the CCP owns the land. At best they only lease it for a max of about 75 years give or take.
          • civilized 4y ago
            Somebody else posted that they tried to make renewal of the lease conditional on payments but backed down in the face of protests.
  • unicornmama 4y ago
    ~96% of us humans don't live in America, most of us don't have 30 year mortgages.
    • thriftwy 4y ago
      I'm pretty sure large portions of Latin America, Europe, ex-USSR and perhaps India/South East Asia have 30 year mortgages.
      • unicornmama 4y ago
        No we don’t. You get 5 year fixed, 10 year max. Beyond is prohibitively expensive.
        • thriftwy 4y ago
          How expensive are we talking about? Of course people tend to pay mortgage early to avoid paying many times over at 10%. But, having small montly payment helps in case you have some temporary financial emergency.
        • mysterydip 4y ago
          Just curious what your monthly payments are like compared to your income.
          • refurb 4y ago
            I think people are confused by the term (length of fixed rate) versus amortization (total time to pay off debt). In Canada mortgages are typically 25 or 30 year amortization periods, but you can only fix the rate for 10 years (usually less as you get a much lower rate). After the 5 years you renew your mortgage at the current interest rate with the same bank, or try and refinance entirely which requires the same paperwork as a new mortgage. The US and I believe Netherlands are the rare countries where you can get fixed rate for the entire 30 year amortization period.
            • 4y ago
  • Animats 4y ago
    > Of course, most US mortgages are taken out on housing units that actually exist. Construction is usually financed by a construction loan, at a higher rate than a mortgage, and the builder is the borrower. But not always. Here are some US failures from the 2008 housing crash.[1] China has an unusual problem - the Party really, really doesn't like elections. For anything. But China has buyable apartments, which work like condominiums. Some organization has to run the building and maintain the common areas. That led to the creation of homeowners' associations with elected officials. This got party officials upset, and now efforts are being made to make HOAs subordinate to the local Communist Party units.[2] [1] https://www.mortgagefit.com/construction/loan-default.html https://www.mortgagefit.com/construction/loan-default.html [2] https://ebrary.net/153835/law/condominium_china https://ebrary.net/153835/law/condominium_china
    • deleted 4y ago
      [deleted]
    • theplumber 4y ago
      [flagged]
      • dylan604 4y ago
        I don't know, I'd be willing to guess that the majority of developers in the US would love to be able to do this very kind of ponzi scheme as accepted and gov't approved business model
        • mminer237 4y ago
          Uh, I've never had an American property developer say how he wishes the HOA could just be part of the Democrat/Republican party.
          • dylan604 4y ago
            Huh? I'm talking about taking money from you as a "deposit" so that he can finish building my house or buying the property for another person altogether with gov't approval yet no oversight on how the money is spent
  • bobthepanda 4y ago
    The other difference is that the vast majority of US mortgages are insured by FHA and so are actually fairly cheap. It’s probably the single biggest market distortion in the housing market. Most countries do not have this.
  • onetokeoverthe 4y ago
  • paganel 4y ago
    > Of course, most US mortgages are taken out on housing units that actually exist. To add to that, taking a mortgage for a house that doesn't already exist is a very used practice outside of China, too, I know over here in Romania lots of people do it. It's called credit for "casa la rosu", basically all you need to show to the bank is a contract between you and the developer and a "registration" thingie for the house in question with the local city-hall (again, even if the house doesn't already exist, in practice). It comes with a price discount (I haven't kept up, I think it's in the 20-30% range, maybe bigger) but, of course, it's all very risky (or at least that's my opinion). That hasn't stopped lots and lots of people from taking those type of mortgages.
    • inglor_cz 4y ago
      I also bought a house recently in very early stages of construction (a year ago, now it is almost finished). In Czechia. The difference is that the developer must be reputable and the price is actually paid in several tranches, as the construction passes defined milestones. The bank will require independent assessments of the state of construction before approving any partial payment. But yeah, it is still risky. You need to contribute at least 20 per cent of your own funds as a downpayment, and the downpayment is paid first. I wouldn't dare do that with an unknown developer. I risked it with a corporation that has been in operation since 1998 and has a lot of references.
• CoastalCoder 4y ago
  Aside from the fact that this is a pyramid scheme, it sounds pretty similar to how it works in the U.S. when building a new house.
  • ratsmack 4y ago
    Three years ago I built a house to sell (I was general contractor) on a city lot my family owned. Before a single shovel of dirt was turned over, we had to pay around seventy thousand dollars for plan review, power connection, water, sewer and gas. This really opened my eyes as to how much mitigation costs have risen over the years. I had built a house in the same area in 1989 and the initial costs were one tenth of that.
    • zo1 4y ago
      Did most of that money go-to or was mandated-by your local government?
      • bombcar 4y ago
        Lots of it is a tax on non-residents; because other tax forms are kept low but nobody "pays" for the permit costs, etc (it's wrapped in the cost of the house).
      • ratsmack 4y ago
        Pretty much, yes.
    • treeman79 4y ago
      I briefly was looking at getting some cheap land in Tennessee get utilities and a trailer to live on to save money. Was Shocked at connection cost for everything
    • everybodyknows 4y ago
      Seems a punitive tax on the entrepreneurial middle class. Such fixed costs might be insignificant for a palatial home. At the other end, large-scale developers know all about negotiating discounts and otherwise offloading costs.
• fma 4y ago
  What happens after 70 years? Especially if the lease isn't renewed.
  • ganyu 4y ago
    Legislation states that the lease is automatically renewed (40yrs, 50yrs or 70yrs depending on how the land was purchased) for residential housing, but there have been rumours saying that related laws will change so the property will be taxed during renewal. Considering that commercial housing started in PRC in the 1980s and the first batch of houses aren't technically expired yet, I think it's pretty hard to say what exactly will happen.
    • yorwba 4y ago
      Wenzhou had 20-year land leases and originally planned to charge a third of the value as a renewal fee when the first ones began expiring in 2016, but ended up waiving the fee after protests. https://www.mingtiandi.com/real-estate/research-policy/china-sets-key-precedent-in-rolling-over-wenzhou-property-rights/ https://www.mingtiandi.com/real-estate/research-policy/china...
    • chii 4y ago
      by deliberately leaving the regulation vague, the CCP is able to use this regulation as a form of control over the populous. Come the 70 yr renewal, if there are citizenry who are attempting to disrupt the power structure of the CCP, they will be the first to lose their lease (or some other method such as a high tax which is equivalent to losing the lease). Mark my words. Regulation that is not fully well specified, and enforced universally, is basically just a political weapon.
      • manquer 4y ago
        "Well specified" regulation is also a weapon. No law is fully unambiguous, clear and without conflicts with other laws for a specific situation, more well specified a regulation is, more you need professional expertise to decode, understand, implement and certify it.
• itronitron 4y ago
  9. Apparently banks in China are blocking people from removing money from their accounts.
  • rfoo 4y ago
    It is not yet a widespread thing. For now. Also, there is no evidence that the disappeared money goes into real-estate/local govt, though it is plausible.
• refurb 4y ago
  To add on top, there are very few trustworthy investments available to citizens. Real estate is one of the few assets that is quite secure when it comes to ownership. Other Asian countries are similar. It’s why your average house in Saigon is more expensive than San Francisco despite a per capita GDP that is < 1/10th that of California.
• deleted 4y ago
  [deleted]
• bogomipz 4y ago
  >."1. Local govts are in heavy debt and sell land to pay back their debt." What is the source of the debt, is it bonds, do they just run a deficit, something else?
  • chii 4y ago
    > the source of the debt paying gov't workers (as well as any outstanding debt from previously), services and such. from what i heard, the local gov't is only paid some 40% of their required budget from the central gov't, and they have to make up the short-fall themselves.
    • bobthepanda 4y ago
      Basically, and also hands are tied as to what taxes can be levied locally.
• y04nn 4y ago
  The pyramid can keep growing while your population is increasing, but that is not the case in China, the fertility rate seems low and its population is shrinking [1]. [1] https://www.bbc.com/future/article/20220531-why-chinas-population-is-shrinking https://www.bbc.com/future/article/20220531-why-chinas-popul...
• renewiltord 4y ago
  Interesting. I wonder why the UK (which also has no ongoing property tax - just stamp duty) doesn't run into the debt problem. Perhaps, it's just that the country got rich during the period when the government was heavily involved in all that.
• dialogbox 4y ago
  It does look like a Ponzi. Aren't there any regulations to prevent that? It's pretty similar to Korea until the step 3 but we have some safeguards after that. Instead of giving money directly to the development corp, we give it to a trust corp. And the dev corps can only use the money to build the building. And if the dev can not meet the due date and if it is delayed more than 3 months, the contract can be cancelled and the owners can get the money back. That very rarely happens because dev corps desperately meet the deadline regardless of the quality. That causes hell lot of another issues but that's totally different story. It seems to me like there are many things missing in the Chinese real estate system. Or is it just because no one cares the regulations?
  • netheril96 4y ago
    There are regulations but badly designed (maybe intentionally). For an analogy to the Korean case, here the dev corps and trust corps and the government entities overseeing them are more often or not in collusion together.
  • ganyu 4y ago
    It is because the people who do the regulations are the people who are regulated. It's like having a root user set up a SELinux policy for himself.
• throwoutway 4y ago
  3 4 and 5 sound basically like the US except less than 20% down (sometimes 5%) Why are you capitalizing owing money to the bank. That’s how mortgages work pretty much everywhere
• differentView 4y ago
  >4. Citizens pay up to 40% of the total price on their own, and ask the bank to lend them the rest of the 60% and get it paid back in the NEXT 30 YEARS (often paying as much as twice as the original price). So they're less leveraged than most American home purchases of 5~20% down payment. 30-year mortgages are also standard in the U.S. You emphasized "NEXT 30 YEARS". Do you think it should be longer or shorter? >5. The bank gives 60% directly to the real estate corp. So in fact the citizen IS OWING MONEY TO THE BANK, and not to the estate corp. That's how mortgages work. Why else would a bank be involved if the money is still owed to the seller? Do you think mortgages shouldn't be a thing, that people should save up 100% of the money then pay in full when purchasing a home? >6. Often, the real estate corp uses this money to pay back previous loans, or use this money to purchase more land from the local govt. So current (future) constructions pretty much depends on whether this Ponzi scheme could continue. You keep describing how this works in most places as if it's something outrageous. >8. ...until no typical citizen will be able to afford it. We're way ahead of China getting to this point here.
  • chii 4y ago
    > So they're less leveraged than most American home purchases of 5~20% down payment. the american home is already built (mostly), for such a down-payment. The bank takes the home as collateral. If it was an off-the-plan purchase (which is what the OP described), you don't really pay the full amount, but just a deposit (like 10-20%). The risk of the development falls solely onto the developers, not the buyer - the deposit is held in escrow, not used for funds to pay for construction or other developer activities. > You keep describing how this works in most places as if it's something outrageous that's because it is, when you compare it to western developments. The risk in real estate development in china lies solely on the buyer, and it's absolutely not the case in the west.
    • manquer 4y ago
      It is not typical in the western markets, but this kind of practice is fairly common in many markets. For example in India it works the same way, and most times the down payment is only 10%-20% or less. Generally the banks don't release parts of the money to you/developer unless certain milestones are complete. [1] The practice of advancing money before construction completes, reduces the price for the buyer as already built properties sell for much higher than buying early. So buying early is way to buy a house when the prices are already out of reach for most. It can work if the project and financing is well regulated by the banks. The property is cheaper[2] because these risks of delays, developer not finishing, not getting approvals so on exist and in theory is factored into the price, along with hedging future inevitable price increases. [1] Indian real estate is by no means healthy and has its fair share of problems with these practices and delays, but not close to China's scale. [2] In theory the risk is exactly matched by discounted price, but in practice seller will usually price it a bit higher than the value warranted by the risk factors. Also on average while it may work out, individual buyers may loose life savings as they are betting the farm literally when any specific purchase goes sour.