How Chinese Real Estate Became the Biggest Bubble in History | Odd Lots

What's land reform?

Yeah, I I've got a chapter on this in the book and it was sort of towards the end of it quite carefully worded to not upset the people that feel very strongly about land reform.

Things you don't talk about on Twitter.

Yeah.

Yeah, yeah, yeah. L apostrophe L and and D reform so the bots don't attack you.

Absolutely.

Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.

And I'm Joe Wisenthal.

Joe, we've talked before in reference to, I think it was the US real estate market.

Yeah.

There seems to be this weird thing going on with housing where it feels like policy makers or maybe people even are not sure what exactly they want it to be, right?

Right.

Is it supposed to be this social good?

Yeah.

This affordable thing, we all can live somewhere that we can, you know, preferably a place we want to live in something that we can afford, or is it effectively a giant piggy bank, an investment vehicle, in which case we would expect prices to always keep going up.

Yeah, right.

This is uh, I mean, the dream, like what I, my personal preference is for uh, housing to be very affordable.

Very briefly.

And then that time that I buy a house, accumulate more housing, and then it stops being affordable.

That's my, I don't, many people have different takes.

I just want a very brief period of.

Well, this is this is another thing about.

It's very important that in that brief period I don't lose my job, it's brief very important that in my that brief period my other investments don't go down.

I just want a very brief period of housing affordable.

But this is another thing about housing, which is like historically, it is one of the few ladders to big wealth for the masses, right?

Yeah, yeah, yeah.

We've all heard the stories about artists in Soho buying a loft for like $500 and now it's worth $10 million.

Correct.

So.

Good, good for them.

The other thing that's interesting about housing, particularly when it comes to affordability, is that this seems to be a truly global challenge.

So people have lots of theories like, oh, it's because they didn't allow zoning in San Francisco or whatever.

And it's like, maybe.

But like, I think any question about housing affordability has to wrestle with the fact that, um, this is a really global phenomenon.

So it can't be some idiosyncratic thing.

It does seem as though places where housing is more affordable do not have particularly dynamic economies.

So it's like, I know the people are like,

oh, Japan.

Oh, look how cheap Tokyo is.

It's like a Yimby success story.

But like they had a massive bubble and it's been deflating ever since and it's not like Japan is at like some cutting edge of particularly any booming industries and its population is shrinking.

Oh, no, Japan's still pretty nice to live.

I'm sure it's very nice.

I'm not saying otherwise.

It's just not clearly not where the action is.

I'd love to go to Japan.

It seems like one of the nice places.

And the other thing that's interesting about this, which is that there are all kinds of ills that sort of bedevil particularly the rich world these days.

And then we look at China, it's like, oh, they have it all figured out.

It seems like housing is a mess in China, too.

One of these rare congratula like sort of like moments where we can shake hands with China, it's like, yeah, we're dealing with a lot of the same issues.

Well, here's the thing, China is like the ultimate example of that tension.

Between investment asset and social good, right?

Because even in China, as you point out, there are affordability issues.

And every once in a while you see policy makers try to put limits on house prices in like really expensive cities.

But then when they start doing stuff that like actually pops housing prices, everyone starts protesting.

In China.

So that is the tension.

I also find real estate speculation in China to be kind of, I thought they were communists.

And I mean that ironically, like where did communists

No, well, this is another thing.

Get the idea of real estate.

Because the social net starts going away in like the 1990s.

And so people have to do something with their money to have retirement income.

I guess the houses in the old days used to like be owned by the companies.

They're more dormitories.

And then when that started split apart.

I don't know.

Maybe our guest knows more.

Yeah.

So we do in fact have the perfect guest.

The perfect guest.

Yes, we are going to be speaking with Mike Bird, he is of course the Wall Street editor over at The Economist and the author of the new book all about this called The Land Trap.

A new history of the world's oldest asset.

So, welcome to the show, Mike.

Thank you very much for having me. Great to be here.

I love Mike, we both love Mike.

So we're excited to have him.

Also someone who spent some time in Asia.

When I was there in Hong Kong as well.

So knows the sort of global history of land.

And I was reading your book and you go all the way back to like Babylon or Samaria.

So, very impressive.

So,

why did you decide to look at land?

It's a great question.

Um, I guess it started, I started my career in London.

And there's a huge thing in London about like housing.

As there is here.

I think it's even even worse in the UK than the US because, you know, the the culture of equity investing and all sorts of other things is so much weaker.

Um, but I guess I I really got into it when I moved to Hong Kong.

Um,

because Hong Kong felt like London on steroids.

The housing was even more expensive.

It was part of, you know, I moved in 2018, you there, Tracy.

It was like the extraordinary bull run, like the absolute peak of the post 2008 surge in Hong Kong.

And learning about how land was really expensive, but also the government owned all the land.

And leased the land out.

And made money from the land.

I found that very confusing.

And abuse it.

And and whatever.

Um, and yeah, Hong Kong was a great place to think about that because it's such a example story of how bad things can get.

You know, if you buy property in Hong Kong.

What exactly are you buying?

You are buying like, you're buying an apartment, right?

But you don't own the land.

Okay.

So if yeah.

Say you're a real estate developer, right?

You you buy a a land lease from the government.

Like a 75 year, 99 year land lease.

They've clipped back and extended the the terms of the lease over time.

But yeah.

That's what you're buying.

You're buying the right to use it for a certain amount of time.

Does it ever just go away?

Like other examples like, you know what, 75 years is up, not your land anymore.

This is a big problem.

This is a big problem.

And in these places in places like Hong Kong and Singapore, you know, there is a

the difficulty of when lots of the land starts to roll over.

When lots of the leases start to get to the end.

The question of whether you just bow to political pressure and just give it to people.

Right?

Just let people keep it.

Or whether you kick them off and start again, whether you knock something down and rebuild.

It's a big difficult issue.

Mozambique is the other country I know that does this, which is kind of funny.

Um, also communist history there.

Anyway.

What role does housing actually play in the Chinese economy?

So, I think the the best part of living in Hong Kong was learning how this relates to Hong Kong, right?

So, put in very simple terms, the 1980s.

Chairman Mao is dead.

Deng Xiaoping consolidating power.

And you're in a strange position where you have to start, uh, or Deng wants to start bringing in market forces into the economy.

But it's pretty dangerous, he's got a lot of political opponents, you've got to step pretty slowly.

And housing is one of the areas that's most difficult.

China's housing at the time is pretty ramshackle and terrible.

It's attached, as Joe suggested at the beginning, to like the industrial base.

Like your employer houses you on a on a farm.

Or next to a factory or wherever it is.

But what China needs is urban modern residential housing.

So,

uh, Zhao Ziyang, who's the the premier of China, uh, later on, and he's one of the the sort of peak reformers in Deng's China.

Um, he credits this to a conversation with a Hong Kong real estate developer called Henry Fok.

Who said, um, uh, in a conversation with him where where Zhao was explaining like the difficulty of, oh, we don't have any money and we can't get foreign investment in.

And and Henry Fok said, but if you have land, why, why don't you have money?

How can you not have money?

Um, and basically they started adopting on a small scale initially the the Hong Kong system.

They started leasing out land to make money, first one of these is in Shenzhen in December 1987.

There's an auction, the Hong Kong government gives them the gavel to to do the auction.

They're auctioning off a pretty small piece of land, but this is a symbolic thing.

Because, you know, it's a communist country and the Chinese government owns all the land.

They hadn't even at this point changed the the constitution to make this legal.

They're sort of experimenting just at the edge.

And then slowly this becomes the main financing model.

There's a big tax change in the middle of the 1990s that shifts this.

But it's a really good way of making money.

Um, especially if you're the only government and you own all the land.

China owns that in in the mainland for for communist reasons, but it's actually a handover to some degree from from Hong Kong.

Actually, can I back up a few decades?

What's land reform? You always hear the people debating economics like, oh, they instituted land reform, this is really important, this and all says, oh, no, actually land reform was not that.

What is land reform?

Yeah, I I've got a chapter on this in the book and it was sort of towards the end of it quite carefully worded to not upset the people that feel very strongly about land reform.

Um,

land reform.

Things you don't talk about on Twitter.

Yeah.

Yeah, yeah, yeah. L apostrophe L and and D reform so the bots don't attack you.

Absolutely.

The land reform, uh, is mostly middle of the 20th century phenomenon.

Um, and and it's basically there was a lot of economic thinking at the time.

There's a guy called, uh, Wolf Ladejinsky.

Who was a US Department of Agriculture employee.

He was an economist.

And he was an obsessive about land reform, which is essentially is redistributing really concentrated ownership of land.

To larger numbers of people.

Especially in the the developing rural world.

We're not talking about like, you know, cities or anything here.

Um,

and he went into Japan after World War II, a bunch of other reformers.

Basically forced the the Japanese government at the time to pass a land reform bill.

Which redistributed an enormous amount of Japan's agricultural land.

This happens in Taiwan as well.

It happens in South Korea.

And there's a huge amount of attempts to do it elsewhere to varying degrees across Asia and other parts of the world.

Basically, it's by far the most successful.

In those three original countries.

They try it in India.

It doesn't work.

They try it in Vietnam, in South Vietnam.

It doesn't really work.

You know.

I think one of the most impressive recurring themes on this podcast, etcetera, is the number of times there is some like sort of very successful project of industrialization or economic development.

And then at the end there's this asterisk, but it's only ever worked in three like East Asian countries.

Here's your solution that you cannot use.

And we have no evidence that any of this works anywhere else.

So now we have, now we have another one to the list.

Yeah.

Um, okay, well, the other thing about land in China, and again, we're sort of fast forwarding, um, back to the 90s.

And we should talk about the Hukou system as well.

Later on.

But.

Land has this really unique position, I guess culturally, socially, and financially for Chinese people, right?

Like everyone basically decides they want to be a landlord, they want to own an apartment, even if it's not built.

You see the ads in like newspapers, flyers, things like that.

In a way that you you don't necessarily see them for stocks or bonds, right?

Totally.

Um, I think there's a big cultural thing there.

I I'm never, I'm never too sure whether I'm like a

culture is downstream of policy or policy is downstream of culture.

Fair enough.

But there clearly is a big cultural impulse there.

Um, whatever it's driven by.

I remember when I lived in Hong Kong, obviously not mainland China.

But you used to get adverts pushed through your door and they'd be like, invest in the Northern English Riviera.

Right, there's there's housing in Leeds and Bradford.

To be bought.

To be bought as investment properties.

This is a big thing.

You didn't get those in Leeds and Bradford, right?

If you live in the UK.

You don't get those adverts.

So yeah.

It's a it's a big cultural thing.

It's also a big thing in the mainland, I think because of, um, financial repression.

Basically, you can't invest long term in the equity market in China, right?

It's a it's a sideways game.

Um, it's a terrible way of compounding wealth.

Um, bank accounts in general in China for a very long period of its modern history had like near a real negative returns.

Um, because of financial repression.

So the question is, if you're saving a lot of money,

where do you put it?

Um, and there's only really been one answer.

It's been a completely rational thing for Chinese households to do that.

Um, you know, extremely high saving households buying property after property.

A lot of them left vacant.

One of the things I say in the book is that China has

the symptoms of both a housing shortage and a housing glut.

Right?

It manages to get the worst of both worlds.

Joe, you know what I call this?

What?

China's great ball of money.

Yeah, that's right.

Rolling within the country from asset class to asset class.

Yeah.

So, okay, the stock market hasn't done well for a very long time.

Rates on savings are very low.

How did like Chinese leaders feel about this emergence of a very speculative, high growth, high return, at least during the good old days before a few years ago, about the emergence of this industry?

About this emergence of this sort of, um, thing that's crucial for living.

And also becoming a major speculative vehicle.

Houses are for living, not for speculation, as some people say.

Um,

yeah.

It's a, I mean.

I I should say, it's an incredibly useful way of building out a city.

Okay.

This this tool is like super powerful.

If you're just starting out.

And no one wants to invest.

It's a really good way of pairing real estate development with infrastructure.

You can pay for a lot of things.

You can do it sort of expanding very, very rapidly.

Plus you boost other sectors, right?

Construction, manufacturing.

Huge employment build out.

Right?

Steel industry.

Yeah.

You don't have to do that much administration.

It's fairly it's fairly easy to do this stuff.

Right?

Um, so there's lots of advantages to it.

I think people start to see the problems even at the level of the central Chinese government in the these sort of early 2010s.

Right? And you get this series of like whack-a-mole attempts to get the big ball of money.

The big ball of credit out of the system.

So the first thing you see is the Chinese leadership saying, okay, banks, limits on real estate lending to developers.

Right?

Which is what pushes them into the international bond markets where most of the the Chinese property developers fund themselves.

Then you see the limits on, uh, borrowing from the bond market, which sort of come in and out.

Uh, during the 2010s and eventually sort of, um, seriously limited in 2020, 2021.

But even then.

You see Chinese developers trying to essentially borrow through pre-sales.

Uh, from ordinary Chinese households, right?

Which is like, you give me all the money to build your house up front.

I promise I'll get round to it.

Um, you know, not stating, actually, I've got 20 other projects that I've got to build with your money first.

There's no escrow system here.

Um, so yeah, you you do see the Chinese government sort of waking up to the problems.

But it's like, it's like in any other country.

You know, it doesn't have, uh, same sort of Western democratic politics.

But how do you get off the train while it's moving?

Right?

And and they've tried with the three red lines.

And the campaign against the real estate development sector.

In the last five years.

And it hasn't gone very well.

You know, something I'm wondering about, you always hear about the CCP.

Trying to, uh, learn the lessons of the collapse of the Soviet Union.

And they don't want to have that fate.

So they're very obsessed with this question of what brought the Soviet Union down.

Do they spend much time looking at the collapse of the Japanese real estate bubble?

And the effect that that had on Japan as an industrial dynamo?

It's a great question.

Uh,

you know, I'm not in, I'm not in direct touch on a day-to-day basis.

My understanding was that they that they did.

That this was a preoccupation of the Chinese leadership.

I used to hear it a lot from people close to economic and financial policy making that this was a serious consideration.

And it was why they didn't want to pop the bubble.

Which is essentially what the Japanese government and the Bank of Japan did, uh, at the very end of the 1980s, early 1990s.

Um,

they seem to have done that anyway.

I mean, it is a fascinating thing.

There's always this discussion of, you know, an autocratic regime can can think in really long term.

You know, they think in decades and centuries.

But in this case.

It was, you know, there was a land financing model.

That China's local governments had, which has been pulled out from under them.

Um, there was an asset class that Chinese households could invest in, which has been pulled out from under them.

The government hasn't replaced those two things with anything particularly good.

We certainly know that they look at it now, right?

Because we had Richard Koo on the podcast a couple of times.

And we know that, uh, deflationary spiral caused by real estate collapse.

Is kind of a, uh, topic du jour over there.

Talk more about the three red lines.

Because this is something, I remember, they came out when we were both in Hong Kong.

And you could see why policy makers were doing it.

And to some extent, you know, okay, house prices came down and there's less new builds and things like that nowadays.

But they also seem to kind of flub them, right?

Yeah.

Totally.

Um, so the three red lines were basically the Chinese government identifies the real estate developers.

As the tool through which they're going to cool the housing market down.

And they come out with the three red lines.

Which are three different metrics of, you know, uh, debt to cash and and other sort of debt metrics.

And they basically say, if you violate, uh, one or two of these, you can maybe keep borrowing only to refinance old debt.

Right?

If you're green on all of the three red lines, you're fine.

Right, if your metrics are okay, keep borrowing, go for it.

But none of them are at this point.

Um, and if you have three red scores on the red lines, basically, if you're violating all of these, no borrowing even to refinance.

Right?

You've got to pay down debt.

Now, these companies are some of the most insanely structured financial vehicles in history.

Right, they can only expand through extremely rapid debt driven growth.

Right?

The model is such, you know, if you're Evergrande, you're paying like a 15% interest on a on your borrowing.

You've got to keep borrowing to expand.

Right?

It's not a good idea.

But you've got nothing else.

The funny thing about Evergrande also is the diversification into a bunch of other things.

I remember again in Hong Kong asking someone like, we should do a graphic of China Evergrande's all, all their different businesses.

Right?

Because it would be really interesting and it took like three weeks to make.

And when it came out, it was almost unreadable because there were just so many of them.

You know what it sounds like?

WeWork.

Yeah.

Which had a.

I mean, that was a company that had diversified into literal wave a wave pool business.

Um, and about a hundred other things, and also just an insanely complicated leveraged organization.

That was a multi-billion dollar unicorn, now is where the bag of Fritos.

We mocked when they they bought, um, Faraday Futures.

Yeah.

The US EV company.

And we all mocked, right?

Evergrande bought Faraday Futures.

Evergrande saying, we're going to be an EV.

Well, honestly, now I'm like.

I'm like, maybe if the the three red lines hadn't come in, we'd be like seeing them drive around.

There does seem to be this, um, Carsonization of Chinese companies where on a long enough timeline.

They're all becoming EV companies.

Like I there was a great article in the Bloomberg in Bloomberg today about or earlier this week.

About multiple vacuum cleaner companies in China that are now releasing EVs.

So I guess it makes sense.

Their their argument was always like, you know, where do you put your car?

In the car park in the estate that you live in.

Who built that?

It was sure.

It was sure.

Yeah.

They believed in it.

But basically, yeah, they they bring the three red lines in.

Um, the the real estate development sector begins contracting very rapidly.

The most indebted companies get into trouble almost immediately.

But also, some of the companies that people thought were pretty safe that borrowed at pretty low rates.

Um, are are getting into trouble fairly quickly as well.

You're sort of country gardens, China Vanka, like they they're all getting into trouble quite quickly.

Um,

what the way I think of it is that basically they the Chinese government attacked the the sector that had grown up to intermediate between the households and the local governments.

But they didn't change anything about the incentives of the households and the local governments.

The households still need to invest.

The local government still need money from somewhere.

And these companies were just making that arrangement work for those two sides.

And destroying them does nothing really, you know, causes a lot of distress.

Construction activity drops.

Lots of people aren't going to get the the homes they invested in through the pre-sale system.

But it doesn't really address the actual core driving forces.

Talk a little bit more about, um, the local government finances.

And what it is about land that is particularly important.

Because there are other ways that local governments could theoretically taxes.

All that stuff.

Etcetera.

Yeah, I should emphasize to anyone listening.

It's like the the I was really interested in the China stuff.

But it's not a China book.

Um,

the two most interesting to me, one of which because I I lived there and I think it's the most unusual and fascinating real estate system in the world.

Is is Singapore.

Um,

which has defied in many ways a lot of the limitations that other countries have seen.

And, um,

the one of the first parts of the book.

Which is like colonial America.

Where there were all of these efforts to, uh, turn land into money.

Right?

These colonists get to a place where they have essentially to them infinity land.

It just keeps going on and on.

They don't know where it stops.

Um, it seems to be relatively fertile and good.

And more people turn up.

And but have shortages in cash and labor and everything else.

And there's all of these efforts to turn land into money with public and private land banking projects.

I found all of that like absolutely fascinating.

It's not actually something I knew very well before starting to research the book.

Yeah.

So Singapore and colonial America.

But tell me, we have a few minutes left.

What is it about Singapore that makes it, I actually, I don't know why I sort of assumed they did the same 99 year land lease.

And that's similar.

They did.

This is the most interesting thing.

They start off with all the inherited things that Hong Kong starts off with.

You know, up until the middle of the 20th century, the cities are run on very, very similar lines.

Hong Kong goes off in one direction.

And Singapore goes off in another.

And the Singaporean direction is basically, how do you maximize home ownership?

Right?

Permanently.

You can't own multiple and rent them out.

There are restrictions on how long you can hold them for, but there's an internal market.

You can only sell them to Singaporean citizens and permanent residents.

The building is done, the amount of building is done to make sure that everyone can afford them.

But the residential real estate, um, and and they've done this in.

Again, they decided land was different.

They have a thing called the Land Acquisition Act.

Which really allowed them to strip a lot of people of their land at at extraordinarily low prices.

Through the sort of 60s, 70s, 80s.

Um,

and and it's allowed them to do something very, very different.

Um,

I don't know whether most countries can sustain the idea.

That capitalism works for everything but not land.

And we're just going to be.

One Singaporean senior politician described it to me as piracy.

What they did in the in the 70s and 80s.

You know, pennies on the dollar.

Basically demanding people hand over this land.

So it could be housing for Singaporeans.

But it has worked very well.

So that the burden of saving for retirement, for health emergencies, things like that.

Doesn't always necessarily fall on the citizens.

And therefore they have to invest in highly speculative assets.

Yeah.

Um, they should.

Is is the answer.

There seems to be huge political opposition to doing this at the top of the Chinese Communist Party.

And it's bizarre, again, because you talk to someone like Richard Koo.

And he'll give you, he'll explain why if you don't do this, this is the consequence.

Japan is a consequence.

Long-term stagnation.

It's going to be really difficult.

Um,

they should do all that.

Um, and maybe they will be sort of drummed into it eventually.

Because I think the alternative is both stagnation and lots and lots of trade friction with the people you're exporting to.

As we've already seen.