Ryssdal: OK, wait. You just told me that there’s an oversupply of housing stock for a country with 1.4 billion people. Make that make sense for me.
Schmitz: Yeah, well, if you come to Shanghai and Beijing these days, you’ll see high-rise apartments as far as you can see. And many of them are just sitting there. They’ve been bought, but they’re vacant. The apartment complex where I live is a good example. In a city of 20 million, I don’t have any neighbors. The apartments on both sides of me are empty. And you see a lot of this in different urban centers in China. And the thing is, many of the country’s smaller cities out west are developing the same way. If you want to see what’s become the poster child of this problem, you can go to Marketplace’s website and take a look at photos from my trip to Inner Mongolia.
Local officials there have built a city the size of Pittsburgh with barely any people living there. So this sort of thing is happening in pockets throughout China and it’s got a lot of people worried.
Ryssdal: What about the hype though? What about the fact that the media keeps saying, “Oh, there’s this property bubble,” and people see that and they say, “Oh, I’ve gotta get in before it gets any higher!”
Schmitz: I think there’s good reason to say that there isn’t a property bubble. One is that no matter how crazy expensive properties becoming in some cities here, income levels are rising too. And many in China’s rural population are moving to urban centers where they’re going to need housing. The second reason is a simple statistic from a recent real estate survey in China: Around a quarter of all home buyers in China are paying for their home with 100 percent cash. That’s a far cry from what happened in the U.S., where you could borrow 100 percent to buy a home. That’s one of the reasons why some think that there’s no way there’s a property bubble forming. You simply don’t have the massive borrowing that you had prior to the real estate cash in the U.S.
Ryssdal: You know, the Chinese economy though, Rob, is so opaque. There must be more at play here than just simple supply-and-demand, right?
Schmitz: Yeah, I mean, there’s a lot of unknowns in the Chinese economy. And we know that many Chinese are coming up with their down payments for their properties by getting loans from what are called “underground banks.” Now, these are informal networks of friends, families, co-workers who pool money together for investments, like property. What we don’t know is how much money’s flowing through these types of shadow banks. But this is important to keep in mind, because if property prices do take a dive, these informal lenders aren’t going to provide the safety net of a huge state-owned bank. And that could increase the severity of a real estate market downturn.