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  • Deep, in the mountains of Austria, lies the small, but scenic town of Hallstatt.

  • But this isn't that, It's an exact replica, built 9,000 kilometers away, near Hong Kong.

  • Austria.

  • China.

  • It's home to European architecture, Chinese cuisine, and all the traffic of

  • North Korea.

  • Because, during the day, it may be the wedding photo capital of the region,

  • But after the sun sets, its cottages become remarkably quiet.

  • China's lookalike towns, of places like Paris, Berlin, London, and Jackson Hole, Wyoming,

  • aren't alone.

  • In many places, across China, there are far more houses than there are people.

  • Long rows of apartments, even entire cities, sit completely, or mostly empty.

  • In total, approximately 50 million units, Or 22% of China's entire urban housing.

  • But this doesn't mean they aren't being bought.

  • Because, they are.

  • Like crazy.

  • Ten years ago, most people were, as you'd expect, buying homes for the first time.

  • Today, it looks like this.

  • Second homes are the majority, and people are buying almost as many third homes as first!

  • These aren't cheap, either.

  • In Los Angeles, the price per square foot is $633.

  • In Shenzhen, 805.

  • And, close your eyes, because you don't even wanna know the price in Hong Kong.

  • Now consider the difference in wages.

  • The average annual income in Shenzhen is around 7,500 US Dollars, compared to 60 thousand

  • in LA.

  • Something clearly doesn't add up.

  • People in China are buying homes like Americans buycars, But they're leaving them empty,

  • And it's not clear where the money is coming from, or why they're being built.

  • The usual explanation is that China's government is so desperate for economic growth that it

  • builds bridges to nowhere and houses tolook at.

  • But that's only one part of a much bigger story.

  • China's troubles begin with its political system.

  • The Central Government is the highest level of its only party.

  • Here, laws are written and the fate of the nation, decided.

  • Beijing is THE ultimate authority.

  • It appoints everyone from secretaries to governors, and isn't afraid to move them around should

  • any one official gain too much influence.

  • BUT - it would also be a mistake to see China as one, singular power.

  • Because below the central government is a network of local divisions: 22 regional provinces,

  • 4 municipalities, 4 autonomous regions, and 2 Special Administrative.

  • Under those are over 300 prefectures.

  • Followed by the less important counties, townships, and villages.

  • Now, just as Californians have different concerns than do Texans or Floridians,

  • China is a big country, and the interests of a coastal exporter like Shenzhen are very

  • different than those of, say, a more independent region like Inner Mongolia.

  • The same is true for different levels of government.

  • While Beijing writes the rules, cities apply and enforce them.

  • Often, very differently.

  • And there's one, awkward little detail: Cities receive just 40% of tax revenue, but

  • are responsible for 80% of their expenses.

  • So, naturally, they need another source of income.

  • And this is where things get interesting.

  • In China, rural land is collectively owned.

  • Everyone, and also no-one, owns it, which means it can't be the location of a new

  • luxury apartment.

  • But luckily for cities, they have the power to rezone land from rural to urban, which

  • can be developed.

  • In other words, they own a money printing machine.

  • Watch this: First, a city buys cheap, rural land, Which it then redefines as urban, And

  • finally, sells to developers at its now, much higher, price.

  • Like.

  • Magic.

  • Over, and over, and over, again.

  • Cities get much-needed cash, and developers build housing like it's nobody's business.

  • Now, unlike states in America, local governments here are generally forbidden from taking loans.

  • But, again, there's a loophole.

  • Cities can create a Local Government Financial Vehicle, which is a fancy way of saying, a

  • state-owned company.

  • And bygivingit that new urban land, thecompanycan do what the city legally

  • can't: borrow money.

  • Which, they can use to build roads, schools, and, on occasion, replica Austrian towns.

  • This is so effective that, in some years, land sales account for 40% of local government

  • revenue.

  • Plus, all this construction increases GDP, which just so happens to be the way officials

  • get promoted.

  • It's a perfect system.

  • At least, until it's not.

  • If, or, when, housing prices fall, so does city revenue.

  • And, all those loans probably won't magically disappear.

  • Beijing wants to avoid a housing crisis, but cities just want to survive, and governors,

  • get promoted, which puts the two at odds.

  • Eventually, cities start running out of land to sell, and have no choice but to build more.

  • Like this one, which spent 2 billion dollars blowing up the tops of mountains.

  • Those developers who purchase that land, by the way, are required to use it, which leads

  • to many, often quickly-constructed, low-quality, houses.

  • And that brings us to the second question: why are people buying them?

  • And doing it like their life depended on it?

  • Well, for one, because it kinda does.

  • Thanks to the famous One Child Policy, China now has the entire population of Canada more

  • men than women.

  • And that means fierce competition for marriage.

  • Men are expected to own at least one property before even being considered.

  • It's one of the most important elements of social status.

  • For many, real estate isn't just an opportunity, it's a downright social necessity.

  • Because of this, friends and family pool money together to help buy homes for their children.

  • And that's how, nearly everyone, in a country with the per capita GDP of the Dominican Republic,

  • can afford some of the most expensive homes on the planet.

  • The other big factor is that Chinese citizens Save.

  • Like.

  • Crazy.

  • When it comes to saving money, there's China, and then there's basically everyone else.

  • Where, Europeans put 4 percent of their disposable income in the piggy bank, Chinese drop nearly

  • 40!

  • The problem is, where can they put it?.

  • China's domestic stock market is just too risky, And its banks are often seen as unpredictable.

  • Which makes real estate a Chinese investor's best friend.

  • It alone accounts for 70% of all household wealth.

  • It also doesn't hurt that property tax is a beautiful 0%.

  • When taxes are only paid upfront, why wouldn't you buy as soon as possible, and just sit

  • on it?

  • Put all this together, and you have a recipe for extreme house buying.

  • An amazing 90% of homes are owned by their residents.

  • Europe and the U.S., stand at 69 and 64%, respectively.

  • And while we're on the subject of crazy high numbers, Ninety-four percent of Chinese

  • millennials who don't already own, plan on buying in the next five years.

  • What else do 94% of people agree on?

  • Not even China can quench this thirst for real estate.

  • Despite laws against it, billions of dollars flow out of the country every year into foreign

  • property.

  • It's so common in places like Vancouver, that, earlier this year, it introduced a 20%

  • tax for foreigners.

  • The irony is that while cities like Beijing and Hong Kong have so little room, people

  • are forced to sleep underground, these 50 million homes can't find renters.

  • So, hey, if you live in California, I think I may have found an escape plan.

  • Anyway, not only are these homes bought without interiors, literally just concrete walls,

  • but they're also usually located outside city centers, where there aren't as many

  • jobs.

  • Now, the assumption in all of this, is that, eventually, people will come, And speculation

  • will become reality.

  • The Eastern side of Shanghai, for example, was once laughed at by Milton Friedman for

  • being totally empty.

  • Today, as a financial capital of the world, with a GDP of 400 billion, we can pretty safely

  • say it's proven the haters wrong.

  • China is in the process of migrating 300 million people from country to city, And, of course,

  • they'll need a place to live.

  • Inevitably, many of these cities will spring to life.

  • That doesn't mean everything is peachy.

  • A few things are decidedly not peachy.

  • First, remember that the vast majority of empty homes is expensive, commodity housing.

  • These are not the kinds of places you buy coming from a farm in the country.

  • And second, all these homes have an expiration date.

  • In China, a building can be owned, but the land beneath it can only ever be leased - from

  • the government, for 70 years.

  • After that, it's anyone's guess whether ownership will be renewed.

  • And if so, for how much.

  • But, the truth is, 70 years is pretty optimistic

  • Think about it this way: If construction is good for GDP, why build once, when you can

  • build and re-build every few years?

  • It's kinda like the iPhone, if you'd like to upgrade every year, Apple will happily

  • sell you a new phone.

  • It's certainly not judging.

  • Except, in the case of China's housing, developers are incentivized to make short-term

  • bets, they know their homes will only last a few decades anyway, which means using lower

  • quality materials.

  • Meanwhile, cities continue taking loans and housing prices continue rising unsustainably.

  • Of course, Beijing knows all this.

  • It's aware of the bubble, the risks involved, and it knows more or less how to fix it - some

  • combination of slowing down lending, reining-in local governments, and introducing a property

  • tax, like Shanghai.

  • The problem is, real estate is so intertwined with its GDP, that any of these solutions

  • would seriously risk slowing down its economy.

  • In the coming decades, the world will watch as China does its best to carefully balance

  • its enormous challenges with its relentless desire to grow its economy and realize The

  • Chinese Dream.

  • As Beijing prepares for economic change by