I'm not smart enough to answer off the top of my head but was intrigued and am good at the google:

https://en.wikipedia.org/wiki/Austrian_School

Maybe embarassing because:

"Since the mid-20th century, mainstream economists have been critical of the modern day Austrian School and consider its rejection of mathematical modelling, econometrics and macroeconomic analysis to be outside mainstream economics, or "heterodox"."

Tenets include:

"The Austrian theory of the business cycle (ABCT) focuses on banks' issuance of credit as the cause of economic fluctuations. Although later elaborated by Hayek and others, the theory was first set forth by Mises, who believed that banks extend credit at artificially low interest rates, causing businesses to invest in relatively roundabout production processes. Mises stated that this led to a misallocation of resources which he called "malinvestment"."

w/r/t which see:

https://mises.org/...economys-fatal-flaws

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"Are you sure we're going fast enough?" - Emil Zatopek

The joke references the malinvestment in the Chinese real estate sector and is a nod to Hayek. Ghost cities are one example and the disconnect between rental prices (high-ish relative to incomes) and sale prices (absurdly high) of residential units in large cities like Beijing are another. Given your prior experience as a landlord (IIRC) I think you can appreciate that second point if you think it through.

Premises:

• No building just "exists" but needs constant upkeep and reinvestment throughout its life.
• Proper real estate management requires one to escrow for those future costs and a properly functioning market will factor that in.
• It's far more expensive and difficult to do things like replace or repair things like plumbing in an existing building than it is during new construction.
• Failure to escrow and spend said money on maintenance means that you're basically running your asset "into the ground" which you can think of as capital destruction.

So a 500sf one bedroom in a city like Beijing might rent for $1,000/month but if you were to buy said unit you're looking at paying $750,000. Even before you pay property taxes (I don't know what those look like in China) or insurance (again, I don't know) or a mortgage (I sort of know) that's a really bad investment but people keep buying because people in China firmly believe real estate values only go one way and the only loan underwriting standards are "are you a political dissident, y/n?" so the fundamentals don't matter. Once you adequately escrow for future building maintenance (e.g. replacing the building's HVAC, elevator maintenance and repairs, etc.) it's likely a cashflow negative proposition. Add in paying a mortgage, real estate taxes (if applicable), and insurance (if applicable) and you're definitely looking at a cashflow negative proposition.


Those costs don't disappear just because there's an endless supply of greater fools and government supplied credit. When (if) people start moving into those ghost cities there will be costs to make the buildings functional. No building "sits" well when things like plumbing and HVAC aren't routinely used and nothing is maintained.


Note I'm basing those numbers on a hazy recollection a two-year old conversation with a friend who used to be a power (electricity) trader on ERCOT before he moved to Singapore about five years ago.

Seems a bit like Dubai in 08, and it may be heading that way again

Thanks both

In Qatar they built a hospital for the Asian games of 06, so construction on it started in 99/00. It sat empty for until 2013/14 when they decided to commission it for services. It cost more to bring it back from the dead than to build a new one, and even then it was not fit for purpose

The same as true of Qatari real estate, they built it, sold it to locals at a premium as rentals. Locals could not get the rents that they were promised so they sit empty.

Sharia banking does not help as money to invest is free.......

The creation of ghost cities is an interesting case. My info is 3 or 4 years old, but they exist because the government is propping up loans to boost their economy. In doing so, real estate is appreciating like mad. BUT apartments/condos/etc are worth more never lived it, so you end up with towers and towers full of empty concrete boxes no one will ever(?) live in to protect their value. Empty concrete boxes are worth more than finished apartments!
So you end up with ghost cities that no one will ever live in to protect the investment in the ghost city... ???

My understanding -- and it could be wrong -- is that these ghost cities for the most part were actually filling up rather quickly once they had been built.

I'm not so sure

When I was there, the guys I was with were saying many had been built on a "build it and they will come" basis but the cities have not all taken off as businesses have not relocated

In fact, I suspect much like the middle east, properties were built and they were not connected to any infrastructure - sewage which people realised after they'd moved in and it had all backed up

Or, in the instances of commercial real estate they put up money for phase 1, do ground works. Borrow a little for phase 2 and out up structure and then bank releases phase 3 and they skip town with the cash and hang out on the beach