Garett Jones  

China's Empty Cities: A Family Affair?

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This week I returned from a trip to Shanghai and Nanchang; the latter is in Jiangxi province, and as a GMU aside, the food in Jiangxi was stunning.  I was in Nanchang to give some lectures at Jiangxi University of Finance and Economics, a very enjoyable experience.  

But I'm here to talk about China's empty buildings: The ones everyone sees when they drive through China's growing cities, the ones that show up in YouTube videos.  

Nanchang, a city of about 5 million, has an entire new central business district that looks fairly empty: Early in the evening, the 40-story apartment buildings are mostly dark dark dark.  

A sign of rampant speculation?  A sign of home-flipping, with apartments used like the tradable tokens in one of Vernon Smith's bubble experiments?  Or perhaps the best available protection against inflation in a country with thin financial markets and where it's tough to get more than 4% in a savings account?  

I'm guessing there's something to all these stories, and the people I spoke with last week--business school students, finance professors, a few investment bankers--tended to agree.  

Then I heard a new story--new to me anyway, but let me know in the comments if this tale is an old one. It's just based on a few anecdotes, so the sample size is small, but perhaps others out there have observed the same phenomenon. 

Here's the story: Two different people told me that their families own a second partly furnished home that nobody lives in but that they fully plan to move in to at some point.  And in both cases, the reason for not moving in was the same: Family ties.  And again in both cases, they could tell stories of other families in the same situation.  So family rigidities might be a cause of ghost towns.  

In the first anecdote, it was important to stay close to the grandparents who provided childcare for a newborn girl.  In the second anecdote, a child was going to college in the central city and the parents didn't want to part from the college-age child, so the family stayed together in the old central city apartment.  Both examples of family rigidities.  

Now, let's glibly theorize about what might be going on if this really is a broader phenomenon (a big if).  How do family ties keep the family from moving to the new home?  One reason is logistics combined with the savings motive.  The new suburbs are nice but they're far from the true city center--so why not wait until other people move in, until the shopping and maybe even the jobs have moved out there?  This is a twist on Peter Gordon's general theory of urban sprawl.  If even one family member feels like staying it might be reasonable to stay.  In the meantime, the house can serve as a savings vehicle.  You can see how if most people decide to wait until the place is half-filled, that channel alone can create ghost towns.  Nobody wants to be the first mover.  

But here's a more public choice oriented channel: Multigenerational families--still common in China through some combination of tradition and grandchild scarcity (and perhaps thin financial markets)--create veto points that are less common in North America.  If the grandparents don't want to move--particularly when grandparents are the family's net savers---that reduces the chance of the whole family moving.  The golden rule at work.  

When key players disagree on what to do next, the status quo will probably win out.  In the meantime, it's reasonable to use the house as a savings vehicle.  Agreement will eventually come, through death, through renegotiation, through better amenities in the ghost towns, but that takes years.  And that means the ghost towns will take years to fill up.  

It turns out Nanchang's ghost town--apparently designed in Singapore--wasn't really empty at all.  Active retail had started to move in, the 40-story apartment building I toured had a modestly filled parking lot, and there was even a little foot traffic in the area at 9pm.  

Of course, even if the ghost town had been a purely irrational bubble the market would eventually clear at some price, so the fact that old apartments were eventually selling isn't evidence against a past bubble.  But by talking with people, asking their stories, I learned about a channel that sounded less like liquidity and more like rigidity.  

Liquidity helps create bubbles.  Rigidity, I would claim, helps to tamp them down.  Customers who plan to eventually live in the apartment they've bought, customers who have already furnished it with their own family photos and knick knacks, are more likely using cool, rational, System 2 forms of thought, the kind of thinking that tamps down on bubbles.  

There surely have been bubbly tendencies in the Chinese housing market, but if family rigidities are important, those rigidities tend to reduce them--and help explain why these new cities are empty for so long. 


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COMMENTS (11 to date)
gwern writes:

Family ties are hardly unforeseeable issues; why would these hundreds of thousands or millions of families be buying houses they predictably (both from their inside view of their particular family ties and from the outside view of hearing of empty cities) won't move into anytime soon?

Garett Jones writes:

As I note, it's a savings vehicle. So they know they're not going to move in, they just wanted to park the money somewhere other than in a bank paying negative real rates.

Other motives are possible, but that'd be more speculative. And the urge to save in a nation with few legal savings opportunities is quite a lot of motive.

Steve Sailer writes:

The advantages of living close to your kin are enormous, especially in child care savings. Up through the end of the 1960s, my inlaws lived within walking distance of both sets of grandparents on the West Side of Chicago and it made for a much easier life than what they subsequently endured in the exurbs far from relatives.

I suspect most of the rest of the world thinks Americans were crazy to let themselves get pushed out of their cities into distant suburbs and exurbs. Parisian, for example, didn't let demographic change drive them out of their beloved city. They just built housing projects out in the ugly suburbs to warehouse the newcomers while they kept Paris.

Patrick writes:

Garett -
Very much appreciate your thoughtful post. That said, I'm struggling to understand your logic. Your hypothesis - that this is primarily a savings vehicle - doesn't necessarily make Chinese real estate any less of a bubble.

For example, how do you see the China example differing from, say, Ireland?

Brent writes:

Well, I live in Shanghai and have previously lived in Shenzhen. I have to say there is a lot to the family thing. For example, people own apartments (condos) in the coastal cities, but spend a lot of time in their hometowns inland and vice-versa due to family ties. Also, there are a lot of families that buy or rent an apartment in the city for their college kids and these go unoccupied during different times of the year. Parents also do this if their k-12 students are in boarding school... meaning the apartment is mostly empty, but it is a place to stay on a weekend visit if they decide to visit their kids.

Keith writes:

I live in northeastern China. Several people have told me that wealthy families tend to buy multiple homes for their children to live in when they grow up.

There is especially strong motivation to provide sons with houses, because males without their own homes are considered less marriageable.

As for why the families buy them now instead of closer to when anyone will actually live in them, I'm not sure. The people I've talked to seem to believe that prices will continue to rise, so I suppose the sooner they buy, the better.

Steve Sailer writes:

Assume that China in the future will have both more cars and more environmental regulations. Under that scenario, a newly built suburb that's kind of far from transit today will be more accessible to more people in the future when they have cars.

But, maybe there will also be more environmentalism and peasant farmers will be tougher to push around. So, it will be harder for developers to build new housing in the future.

In other words, China will become more like California. So, buy now.

Garett Jones writes:

@Patrick:

What I'm arguing is that the ghost towns are consistent with a non-bubble explanation.

The family rigidity channel explains the observed phenomenon---so we can't just look at empty cities and say, "Hey, obviously a bubble."

@Keith:

I've also heard and read about parents buying homes for sons to make them marriageable. The sex-selective abortions of the last few decades have created a strong bargaining position for the females who survived to adulthood.

Keith writes:

@Garett:

Yes, that's true. Yet here is a contrary datum:

http://www.foreignpolicy.com/articles/2012/04/23/the_startling_plight_of_china_s_
leftover_ladies?page=full

patrick k writes:

Putting aside central planning vs individual speculators etc, I think the one thing we can be certain of is these buildings will be stuffed at some point based on current demographics. By some estimates China needs thousands more of these empty cities. Might as well build them now before the rush!

Patrick writes:

Garett - appreciate the reply. I understand that is what you are arguing. I'm questioning the likelihood that your premise.....is the reason for ghost cities...and the degree to which it makes a real estate bubble unlikely.

For example: during the US housing bubble, there were countless explanations offered for why we weren't witnessing a bubble. It turned out that, even if some of the explanations made logical sense, we still in fact saw a massive speculative bubble. That could certainly be the case in China - I would argue that it's highly likely.

Again, thanks for all of your thoughtful posts.

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