On the Frontlines of China’s Real Estate Bubble

China’s real estate boom is one massive swindle. Not only are billions being spent on empty cities and lonely skycrapers, but a comparable amount of money is being spent by property owners on furbishing and re-furbishing their new apartments with shoddy work, overpriced appliances and other useless trappings of the wealthy elite. Apartments sold for millions of RMB are structurally worth much less and the cost of outfitting one of these apartments reaches the price per square meter of buying one in the first place.

The devil in many cases is not just in the spectacle of a slowly decomposing city in the desert, but in the exorbitant fees being doled out to under-qualified and downright unscrupulous detailers who wouldn’t know a level from a jackhammer.

We Don’t Need No Ruler

Wealthy Chinese are buying up homes and they often sift through catalogues for a set package. The package is then handed over to a design firm or construction company that prints out intricate 3D renditions of the home for the client. The problem is, farmers can’t decipher 3D and most if not all of the workers putting together the cabinets, measuring out the dimensions of windows, and tiling the bathroom walls are cheap countryside labor accustomed to cheap countryside construction methods.

Chinese kitchen floorplanEverything gets measured using the ??? (chabuduo = near enough) maxim, especially when the plans are written in the equivalent of a different language. Just because the home costs 100x what a farmer pays for his house does not mean the quality of anything in the home is anywhere near the same ratio. The concrete is watered-down, the wood is knotty, the metal is thin, the screws strip easy, the silicon peels, the tiles crack and every single measurement is off. So for one house I stood in and marveled at, the difference between the lowest point of the floor and the highest point was 15cm. That is quite a difference.

Most customers have no clue that the tiles in their bathroom are uneven, that the cabinets aren’t flush with the walls or that the walls themselves lean. For them it’s just a matter of dishing out the cash necessary for the designer couch, brand name toilet, the western style washer/dryer and surrounding everything with the best Ikea has to offer.

But if you happen to know something of construction, then you will end up puling your hair out in frustration as yet another crew of workers walk off of the site because they were required to add level after level of flooring just to reduce the discrepancy from 30+cm to 15cm and that is something that is just way out of line. The vast majority of a crew’s clients will never require them to fix or re-do a thing – when they are forced to do so for the same wage, then outfitting a house can stretch out across months and months.

And why go through all that trouble when it was good and chabuduo to begin with?

Everyone’s In On It

Chinese buildingThe new middle class wants things like washers and dryers, water softeners, international brand name toilets and sinks and they are willing to pay for them. The drive to not only be wealthy but seem wealthy gives construction firms the license to sell three water softeners to one home for $6,000 USD a pop when one will suffice for anything save Buckingham palace. (The parts to make one in China cost around $600 USD and a manual can be found online; a comparable water softener in the US costs between $600-800 USD).

International players like Kohler and G.E. are aware of the big bucks to be made off of wealthy yet ignorant Chinese homebuyers. Kohler manufactures sinks and toilets in China (definitely NOT for export). The sinks are often not flush and the toilet seat comes with one set of screws, nuts, bolts and clamps. If the set does not fit the design you had for your bathroom, then you are out of luck. Kohler does not service anything and will not sell one single screw. Kohler in Sheboygan and elsewhere probably has a different track record for service and quality, but in China they (or their local partner) can get away with bad quality, unresponsive service and still be able to charge more in China than for the same product sold in the USA.

G.E. sells their older model washers and dryers here in China. Not only are Chinese buying an older product for around 10,000 RMB, – almost twice the price of GE’s newest and most popular model – but few, if any, Chinese homes are designed with a washer and dryer in mind. Installing a washer and dryer is not rocket science, but it does require a bit of know-how; how many contract laborers scoured from the underpasses along Chengdu’s Third Ring Road have any clue how to install one? The answer is not many. One homeowner put her washer and dryer in a room in the basement. When the black mold took over the room and started invading the rest of the house, she called up and asked,

“You have a washer and dryer right? What do you do with all of the black stuff?”

The Bubble From the Bottom Up

Chengdu apartmentsIn Chengdu, property value within the Second Ring Road has doubled in most places and tripled in others over the past two years. All of that value is speculation. The buildings themselves are already cracked and peeling. In some cases, such as the new high-end complex near Jiuyanqiao Bridge, low-quality steel and concrete is causing the building to actually twist toward the top… resulting in constant calls to Otis to repair the elevator…

But property owners are paying more for their apartments and investing everything they have into property because, regardless of what condition the building is in, the price jumps 100% every 6-10 months. Each jump allows brand name appliance and furniture companies to widen the profit margin an inch. Construction companies make more, design companies make more, fabric and wood suppliers make more. It also gives an army of laborers from the countryside a living wage and the ability to walk off of a demanding site to do another quick and sloppy job for some rich city slicker.

Chinese apartments

How long can it last? No one in the industry is asking that question out loud. If they’re smart they’re stacking cash for the rainy day when Chinese homebuyers either wise up to the pig’s ear they’ve been sold or the price train just plain runs out of steam and comes rolling down the hill taking everyone down with it.

Until that happens (if that happens), then homebuyers will have to take solace in the fact that, although not a single line in their new home is straight, the value still shot up from 4000 RMB/m2 to 12,000 RMB/m2 while they were getting the furnishings done.

34 thoughts on “On the Frontlines of China’s Real Estate Bubble”

  1. So glad I was brought up in a wood n’ nails New England farmhouse.

    We had the same issues of shoddy construction at the EXPO village: moldy bathrooms, unlevel doorways, leaking pipes etc. Way to make a good impression on people from LITERALLY the whole world.

    I find the cheaper communist era buildings in Yulin/Zongbei to be of much better quality than Tongzilin. The floor in our practice room has rotted out, ceiling leaks when it rains and my roomie’s veneer floor has warped so badly that he had to take the door off the hinges!

    • Yeah, your place is a great example. Really nice spot that’s luxurious but everything has warped and distorted in a few years it looks like. Having to unhinge the door because of the floor warping, wow.

      I agree about the buildings in Yulin and Zongbei.

  2. This is such a far reaching topic, I almost don’t know where to begin, so I’ll start with my own recent experience right here in Chengdu.

    I’ve been here almost a year now, landing in Chengdu late December last year. I was initially put up in a serviced apartment by my employer, which although comparatively luxurious, was too small for me to feel comfortable in. At approx. 50m sq, including (as I later found out) the walkway outside of my front door to the elevator that unscrupulous developers are charging buyers for, the apartment was not where I wanted to remain.

    So began my soon to be arduously comical search for a decent place to live in the city. I was particularly diligent in my search, wanting to get a good feel for real estate in Chengdu, not least as I’m here working for a property developer myself. I used a number of websites to build a list of properties/apartments, and also began vetting agents who seemed at least half way efficient. Little did I know!

    At first I was looking at the most recently completed complexes in various points across the city, though initially just in the South. ‘Master’ building was one such property, and I recall being shocked the moment I got within the perimeter of the building at just how unbelievably bad the workmanship was on all of the exterior finishing. Misplaced/misaligned glass panels, non uniform sealant, poorly finished concrete, uneven/sloppy paintwork, and a slew of construction debris still remaining. It wasn’t about to get any better once I stepped inside!

    I was met by an agent who had set up some 5 or 6 ‘viewings’, which I then found out often meant standing around waiting for the landlord to get him/herself in gear and show up. Another phenomenon here in Chengdu/China is the developers practice of selling units without finishing of any kind, leaving purchasers to carry out all such works themselves. I should point out it is my job to essentially oversee all facets of new construction from the ground up, right through to purchase. One major component of my job is to critique finishing, and then subsequently create deficiency lists for all sub contractors, who then typically return and make good. It was pretty clear from the get go that no such lists are being made here. I couldn’t believe just how bad everything had been put together, let alone the often hideous colour/textile coordination on display. From purple couches on green carpet, to cracks running the entire length of walls, I was in new territory, and it was scary as hell.

    This continued on for almost 3 months, in which time I viewed a total of 50+ apartments. I’d had to put up with agents showing me properties that didn’t match in any way what I’d specified, along with all the cat and mousing, to finally accepting that I needed to just take something to save me from my search nightmare. And so I settled for a 2 bedroom furnished apartment on the 35th floor of one of the Times Residence buildings. Newly completed beside Lang Kwai Fong, and since having become the most expensive real estate in downtown Chengdu, I was at least happy to have found something new, with an awesome South view from the living room and bedrooms. The games began pretty much immediately. Over the next 6 months I fell into a continuous battle with the landlord’s property ‘managers’, who had been assigned to take care of the 5 properties comprising the 35th floor he had bought as an investment. I did some homework and found out that he had originally let his ‘girlfriend’ take care of the finishing, at which point it became fairly obvious that she had taken the money and spent as little as possible on construction costs and furnishings. In my 6 months tenancy I had to endure 3 kitchen floods, failing back flow preventers (creating a permanent stink throughout the apartment), a faulty shower drain, a front door that wouldn’t lock, intermittent power cuts, and a whole host of defects due to poor finishing. I’ve probably forgotten a few items, but I’m not going to think too hard on it trying to remember, the experience itself was draining enough. It took almost 3 months to get a response to anything, whilst my agent had absolved himself of any responsibility in that time, and finally in the fourth month I was sat down trying to negotiate with the managers. It became immediately clear they did not have a clue how to go about fixing anything, and even though I’d helped them create a thorough step by step list of things ‘to do’, they fell short by continuing to bring workers into the apartment who may as well have been blind. Sure enough a comedy of errors ensued, with works needing to be redone almost as soon as they were complete. In the end I gave up and went about finding a new place.

    This time luck must have been on my side, as I immediately found a new, fully furnished apartment within the same complex. It’s larger, with a more thorough quality of finishing (though far from perfect), and so far has been more or less hassle free. I even bought some plants yesterday, as for the first time since being in Chengdu I feel like I have a place to call ‘home’.

    My observation so far has been that if there is one thing above all else missing from the property equation here, it’s regulation. There isn’t any anywhere. Not with the developers, and not with the realtors and rental agents either. It’s an essentially free market, open to anyone with the money required to open up the necessary doors. Developers have no trouble finding new projects, realtors have no trouble finding buyers, and buyers have little trouble renting out without having made sure their properties meet a standard of acceptance. There is no standard of acceptance!
    I’ve worked in the UK, and Canada, where (as in the rest of Europe and North America) there are continuous codes of conduct in place for all concerned with property development, speculation, and sale/rental. All parties are protected by law, led by a series of codes and conducts designed to ensure a level of protection otherwise seemingly absent here in China.

    I’ve witnessed some alarming incidents on site at my current project, and each and every time it comes back to there being no universal reference to which works are carried out by. And this is the point that has far reaching implications, well beyond the proverbial bricks and mortar of construction. If China’s development continues to pace at anything like existing levels, that means a whole new terrain of construction, all being built on a shaky foundation, literally! This will have significant implications on future sustainability, as much as market value and growth. I still believe that China will be insulated from any ‘crash’ or sharp decline for several years or more, but if we are set to see a series of failing properties brought about by corner cutting, and little due diligence, that conjures up some scary scenarios for the newly floated middle classes, and anyone buying into the arena. Even if we consider the resources available here in China, and the scale upon which things can be carried out, it will always fall back to the foundation upon which it is built. High rises will continue to soar upward along with prices, but at some point there will need to be a closer connect between the ambitions, desires, and true values of the market as a whole, or it has the potential to create a void of unthinkable consequences.

    From where I’m standing, that’s going to require a paradigm shift in thinking at all levels. Don’t hold your breath.

    • Yes, it will require a paradigm shift in thinking at all levels, starting with with the accountability of the government. Most Chinese people know what the problem is, but cannot (or unwilling) to do anything about it. Instead, they (at least the rich ones) choose to simply immigrate.

  3. I thought this was going to be about the prices starting to slide Sascha, which over the last few weeks they have finally started to do.

    We are, for our sins, in the process of getting a place ourselves. Ling and I first agreed a place for 8000 a sq.m. As we were the in the first batch to reserve the property we got a 10% discount, which put it at around 7300 sq.m. We haven’t yet, though, done the main deposit and mortgage part. It now looks like they are going to be offering it to us for 6500 sq.m. That is a 1500 sq.m reduction in the space of a month or two.

    The average price in Xi’an had been going steadily up, to this 8000 mark, amazingly it is now sliding, and this is happening all across Xi’an.

    Not sure what to make of it all really.

    I must say I had to get my head in a position where I was prepared to accept I may well lose everything before i could even start this process, we’ll just see where we go from here.


  4. @ Brendan, you should keep us posted on stuff you observe and deal with through work.

    @Richard, long time no hear, good to see you again;) hard to say what’s going on with property, but just a shot in the dark: Xi’an is a dusty village resting on ancient laurels; Chengdu is a bustling hub trying to become a metropolis. So here prices are rising, in Xi’an not so much. You and yours are welcome here anytime 😉

  5. Brendan you should do a post “Day in the life of a UK Construction Worker in China”. Or something along those lines. It would make for a great read.

    And yes I’m eager to move out of Tongzilin it is such a sham on so many levels.

    i.e: The local Lanzhou noodle shop charges 12RMB for noodles what costs 8RMB elsewhere. and you don’t want to get me started on the cars and non-existent sidewalks.

  6. You may well be right there Sascha, but sadly I lost my heart to Xi’an some time ago now, just the way you foolish Chengdu do lot have done there. Looks like I am now going to have to take the rough with smooth in this little relationship.

    I think, though, this is a wider issue than just Xi’an. Wouldn’t be surprised to see a few of those families in Chengdu finally getting their dryers installed, only to turn around and find 10-30% has been wiped off the flat price.

    More worrying than the price situation itself is probably the effect it will have on the already corner cutting work done that Brendan highlighted. Developers not being constrained by regulation and finding 10-30% wiped off sale values, it doesn’t bear thinking about where they are going to find a few savings.

    Take it easy you Chengdu lot.

  7. None of this comes as a surprise to anyone who has survived a drafty winter in a poorly insulated, crumbling Chinese building (one which, most likely, was built within the last decade). It’s difficult not to see this as a significantly larger issue of accountability and foresight, the lack of which has the potential to deal the knockout blow to China’s charge to the top.

  8. I don’t think this comes as a surprise to foreigners living in China but overseas a lot of people might have the perception that China is on top of its game with regard to construction and engineering. As with many things, it’s a case of constructing an impressive facade which is often falling apart from the inside.

    I wonder though, what does it take to get a proper house built here that will stand the test of time? Is there anything that you can do – any developments that cater to an audience with stricter building requirements etc? Or are you just screwed if you buy an apartment in China?

  9. Great article.

    I’m always arguing with my Chinese friends and family about the cost and quality of housing in China. A new block of apartments are for sale, but not yet built for 16000sq.m

    I currently rent a apartment in Famous City near Wanda Plaza. My wife is eager to buy a new apartment, but I’m trying hard to convince her its not a good choice at the moment. Even if we buy a new apartment. It would take at least another five years to move in. Famous city has been open for five years and still half the apartments are empty. I still hear construction noise everyday and the hallways are still dusty. So I would not even consider buying a new apartment especially if I want to start a family. My wife has a lot of peer pressure and pressure from her Chinese parents to buy, but Im going to stand my ground until things change if they ever change.

  10. Great story!

    It does seem like there is a disjuncture between the rise in Chinese GDP due to the real estate market and the actual value that those properties contribute to the economy. Between the inflated price of real estate and its real value lies hidden losses – the future toxic assets of Chinese national banks.

    I don’t think this bubble is on the verge of popping quite yet. But there is a tipping point somewhere in the future.

    How long do you think the bubble will last Sascha?

    • I am definitely not qualified to say – I would guess that the next two years would see price volatility and if there is not a boom to pick up the pace then overall growth will slump as real estate slows down.

      But that’s just what I gather from expert opinion. I guess the major difference between the US bubble and the China bubble is that the Chinese government is continuously bailing out failing banks/lenders/companies whereas in the US they waited till it all came down …

      Also the details of the market in the US were apparent but ignored; here they are obscured and ignored.

  11. So don’t buy. The majority of Germans happily rent. RMB 9000m2 for a 10 year old dump in Zhongbei/YuLin? That’s insane. Ah, but try convincing the Chinese wife/girlfriend/potential wife that buying is insane…good luck with that…

    • Most places that are in that price range are new, but a lot of them are still falling apart already or are poorly attended to. Last night in Brendans apartment, which is in Times #1 building which is very fancy, we noticed “Fuck you” spray painted on the back wall about 3′ wide in the elevator. It’s been there for over a month. That should give you an idea of what kind of management is running these places.

  12. I think a point that’s often ignored is the bias that appears all too regularly in foreign media coverage of the Chinese property market. I’m not about to call a conspiracy theory, but I’ll argue that certain ‘agencies’, be it media or otherwise have motive in allocating columns of rhetoric to the ills of Chinese development.

    Of course, glaring issues exist within all facets of development here, and there is a downside ahead, but the latitude available to the Chinese government in offsetting this is wide. The first to be hit will be those who purchased in the last year or so, though you could argue that this ‘hurt’ is more perceived than actual, aside from any interest rate hikes on mortgages. Property values rise and fall in any economy, so the divider here is whether or not you can afford the upkeep of payments.

    Next to go will be developers who can no longer find funds to continue on, and here’s where all that latitude comes in. There are very few developers who have acquired their lots without the ‘assistance’ of an official or two, and it is the official who is inextricably linked to the development and completion of these projects. The developer is merely the medium by which all this construction you see is carried out. If a developer fails to complete, he will either have been bankrupt, or been forced to sell at a loss. The subsequent buyer is quite often the very official who got the ball rolling in the first place, who will then find himself in the favourable position of being able to sell the development to a new developer, most likely with new, more stringent conditions attached. This is happening across China.

    The question now is whether or not Chinese investors wise to the current flux of property values. Prices are still inflated at some choice developments, and here’s where we’ll see the highest adjustment, even whilst some of these projects will in fact continue to hold their value into the future.

    There is an adjustment ahead, just as there’s an ignorance in the present, but the Chinese economy is not pinned to analytical valuation as in the west. Bail outs are a given here, large or small.

  13. Some major differences in China:
    1.the rate of Chinese with mortgages is very low
    2.foreclosure is almost unheard of here. Banks have limited power to seize a non-commercial property
    3.There is so much excess liquidity in the financial system that any price drop will likely be short-lived (as occurred after the Wenchuan earthquake). Bargain-hunter/scavengers swoop in very quickly. After all, where else are you gonna put your $? Interest rates are lower than inflation, the stockmarket is volatile and lacks any kind of transparency and other investment options are basically no-existent…

  14. A good article, and generally very accurate.

    I suppose some things to do to ‘take care’ when buying – is not to buy early. Sure, you save a lot of money – but you have absolutely no idea what you’re getting into. It’s better to look at properties ~80% constructed – you can see how they’re building their walls from different levels of completion, some finished areas to kind of ‘guess’ what things will turn out like in terms of quality, and look for developers/foreign development companies with other properties you can check out and rate their quality.

    The prices are definitely a farce. Sure, it will keep going up as long as investors keep buying investment properties, but average families in China who don’t already have a home (usually assisted purchases with family support) likely won’t be able to soon enough, and when there are tons of empty places and nobody left to buy….

    I don’t think investing in an apartment is a wise choice in Chengdu at all. That being said, recently I saw a floor plan of a place that’s complete/delivered in the next couple weeks, and it was a floor plan I could work with – quite a big place, around 150sqm, and lots of breakable walls. It’s located directly across the street from Ikea/Auchan, which works for me, so I bought it. For construction/decoration quality – if you leave it up to workers, of course it’s going to end up being a horror story. I am lucky enough to have a builder with a team who knows how picky I am, knows my demands on quality control and has done several office construction projects that I have to approve – so he also hooks me up with pretty good pricing. That being said – when it’s your home being built, the only way to assure good quality is to get your hands dirty – and I plan to be involved hands-on during the whole process. I still have doubts, but we’ll see.

  15. No matter how bad, how bubble it is, I think it’s still better than US.

    Each properties in US have been multiply mortagaged by banks.

    People spend their whole life trying to pay back the loan and in the end, some of them are forced to lose their propeties.

    I agree the property price in Chinese 1st tiers cities is bit bubble but it gets better now. Also the quality should be inproved a lot.

    Still a long way to go, but not such negative and extreme as you guys described.

    • Hi Summer:

      This essay is about quality and price. Basically, the price you pay for the level of quality you get is “negative and extreme.”

      How is the bubble getting better here in China? I am not asking to be mean or facetious, I really want to know.

      And one more thing. There is an argument called “I stink but you stink worse” and what that does is draw attention AWAY from the stink and toward a conflict that doesn’t need to exist.

      I agree with you fully that the bubble in the US is extremely negative and tragic. US banks are thieves and liars and the government is their slave.

      Can you admit that about the banks and government in your country? Or must you draw attention away from the stench?

  16. Interesting, i just did a quick poll with my advanced English class:
    14 students
    10 own a combined total of 16 apartments (hey it’s China, and these guys are not exactly laobaixing)
    9 of the apartments are over 8 years old
    only 1 person reported problems with shoddy work….

  17. Interesting article. I always complain about the quality of new construction here in Canada but perhaps I should not complain too loudly. It is always worse somewhere else!

  18. I moved into a brand new two bedroom condo in Beijing In September. I moved out end of December. Water from the bathroom in the condo above was saturating the plaster in mine and mold was growing.


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