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“The greatest trick the devil ever pulled was convincing the world he does not exist.” The Usual Suspects.

That may well be the case, but today we’re talking about the role of real estate in China’s developing economy and the greatest trick man has ever pulled is convincing people that property must always increase in value over the long-term.

The usual suspect in all cases where greed overrides common sense - is never found in a line up, but often found in the mirror...

It’s a strange place this world. Wherever you are in it, one of the certainties of life is that you will believe that house prices will always increase over time (ignoring occasional fluctuations). This ridiculous idea is based on the idea that with a finite number of houses and far fewer people than homes to go round – that they have to be worth tomorrow than today.

Why is this ridiculous? Because it ignores the fundamental truth that you can only sell something for a price that the market will bear. Wages in the West have been static in real terms for the vast majority of people for over twenty years. Property prices have risen to such a point that valuations are so far in excess of what people can afford, that we had a big old property crash to fix that – until the delusional get excited again and start chasing wealth in bricks and mortar all over.

Here in China, they snigger at the greedy Westerners and cannot believe how foolish we’ve all been – borrowing money to buy worthless crap is a Western problem. Or is it?

Here’s the thing, real estate is one of the key drivers of internal economies – when nations develop it’s important for them to embark on enormous building programs. Why? Because all that money will be spent in country. It creates real jobs; real accommodation for people who need it and hopefully it also creates profit which can be spent on building more stuff, in an endless loop.

Real Estate, I could give it up tomorrow, I could you know... people really need to stop being fixated on owning land - the reason that the world's tallest building is called the Burj Khalifa and not the Burj Dubai is a salutory lesson in not understanding that basic fact.

It’s a nice theory, but as Dubai found out recently in practice it doesn’t work so well. There’s only so much demand for luxury homes in a boiling hot sand pit. And once everyone notices that people aren’t willing to buy a flat for 20 times what was paid for it 2 years previously, the prices of those flats start to spiral down the toilet. This is doubly true when everyone borrowed money to buy their homes – as the banks start getting really nervous.

In China, they didn’t borrow money to buy homes. But many people have used apartments as an alternative bank account in case it turns out they can’t trust the banks. This is where things start getting really stupid – in Beijing the average cost of a 100 square meter family home is 50 – 75 times an average annual salary for a worker in the city! In Shanghai it’s 25-50 times. Here in Shenzhen it’s about 20 times…

All of the cities have loads of lovely new housing stock, and most of it is empty. In fact because Chinese developers tend to be less than holistic in their approach to building – most of these are in fact empty concrete shells, that haven’t even been connected to an electricity supply or seen a lick of paint, or any kind of flooring etc.

For those of you familiar with being in China - streets are never, ever this empty even in the wee small hours of the morning. Something is seriously wrong in Ordos.

In Ordos in Inner Mongolia, you can find a city – built for 2 million people, with only 20,000 actually living there (and that’s an optimistic number – pictures suggest far fewer folks in fact) and yet – they’re still building more places not to stay, and reporting month on month increases in the costs of square footage.

That’s right China has brand new ghost towns, with all the mod cons – even stadiums that will never play home to any crowds. And that may lead to some serious problems further on down the line…

And we’ll have a look at how exactly that might play out tomorrow. Thanks for reading.