[ganyu]

Short (?) intro for those who don't know how it works in CN:

1. Local govts are in heavy debt and sell land to pay back their debt.

2. Real estate corps pay a hell lot of money (don't care where they get them) to purchase a land ownership (for 70 years max) from the govt.

3. Before construction even begins, the real estate corps start selling the houses to citizens.

4. Citizens pay up to 40% of the total price on their own, and ask the bank to lend them the rest of the 60% and get it paid back in the NEXT 30 YEARS (often paying as much as twice as the original price).

5. The bank gives 60% directly to the real estate corp. So in fact the citizen IS OWING MONEY TO THE BANK, and not to the estate corp.

6. Often, the real estate corp uses this money to pay back previous loans, or use this money to purchase more land from the local govt. So current (future) constructions pretty much depends on whether this Ponzi scheme could continue.

7. With the money earned from selling the land, the local govt could pay back the loan and ask for more, in order to build more infrastructure so as to pull up estate prices, from which it can earn more by selling more land.

8. ...until no typical citizen will be able to afford it.

[sbierwagen]

>get it paid back in the NEXT 30 YEARS

Why emphasize that? 30 year mortgages are common in the US. At current rates of 5.5%, the total paid in interest will be bigger than the original loan.

Of course, most US mortgages are taken out on housing units that actually exist.

[kevinventullo]

I agree with you, and just wanted to add that saying one pays “more” in interest than the original loan value is implicitly ignoring the time value of money, in particular equating 2022 currency with 2052 currency.

[jollybean]

That's a valid point, but it's not hugely relevant to the situation, as all loans come with interest payments and loans over 30 years at ~6% or whatever will accumulate a lot of interest. It's something to talk about, but another thing altogether.

The mechanics of this are a bit scary, I wonder how much real data there is on it.

Paradoxically, if it were the US, it would be so bad it may wipe out the nation.

But Xi has the Central Banks politicized fully ... he can make currency worth whatever he wants. He has to reallocate/rebalance without causing a revolution.

And if it does get bad, they may try to start a war as a distraction. That sounds extremely cynical but it's a real thing that happens.

[imtringued]

Isn't it odd that money rules governments? It almost as if the government is just a lapdog for someone else.

[Animats]

> Of course, most US mortgages are taken out on housing units that actually exist.

Construction is usually financed by a construction loan, at a higher rate than a mortgage, and the builder is the borrower. But not always. Here are some US failures from the 2008 housing crash.[1]

China has an unusual problem - the Party really, really doesn't like elections. For anything. But China has buyable apartments, which work like condominiums. Some organization has to run the building and maintain the common areas. That led to the creation of homeowners' associations with elected officials. This got party officials upset, and now efforts are being made to make HOAs subordinate to the local Communist Party units.[2]

[1] https://www.mortgagefit.com/construction/loan-default.html

[2] https://ebrary.net/153835/law/condominium_china

[paganel]

> Of course, most US mortgages are taken out on housing units that actually exist.

To add to that, taking a mortgage for a house that doesn't already exist is a very used practice outside of China, too, I know over here in Romania lots of people do it.

It's called credit for "casa la rosu", basically all you need to show to the bank is a contract between you and the developer and a "registration" thingie for the house in question with the local city-hall (again, even if the house doesn't already exist, in practice). It comes with a price discount (I haven't kept up, I think it's in the 20-30% range, maybe bigger) but, of course, it's all very risky (or at least that's my opinion). That hasn't stopped lots and lots of people from taking those type of mortgages.

[inglor_cz]

I also bought a house recently in very early stages of construction (a year ago, now it is almost finished). In Czechia.

The difference is that the developer must be reputable and the price is actually paid in several tranches, as the construction passes defined milestones. The bank will require independent assessments of the state of construction before approving any partial payment.

But yeah, it is still risky. You need to contribute at least 20 per cent of your own funds as a downpayment, and the downpayment is paid first. I wouldn't dare do that with an unknown developer. I risked it with a corporation that has been in operation since 1998 and has a lot of references.

[bobthepanda]

The other difference is that the vast majority of US mortgages are insured by FHA and so are actually fairly cheap. It’s probably the single biggest market distortion in the housing market.

Most countries do not have this.

[ganyu]

What's the household leverage ratio there in US? That in CN is 72% in 22Q1, and even bigger in big cities.

Edit: CN definition: (household leverage ratio) = (mortgages paid in 22Q1) / (total disposable income in 22Q1)

[HPsquared]

What ratio is that measuring, loan-to-value or loan-to-income?

In the UK at least, a buyer can borrow up to 95% of the home's value and I think 4 or 4.5x the borrower's annual income.

[ganyu]

+HPSquared For total value it's up to 80%, and when comparing to income you can borrow up to 50% of the (before tax) monthly income, for up to 30 years.

[ganyu]

30 years are pretty common, but paying for some property that never came out of the blueprint (and seemingly never will) does sound a bit odd..

[dirtyid]

Preconstruction sells at 30% discount, people gamble with their life savings considering PRC housing prices to income, but flip side is also massive speculative profit if things work out.

[civilized]

Ah, so this is just crypto and ICOs. But at least you get rights to real physical property instead of virtual Pokemon cards.

[chaostheory]

Well, the CCP owns the land. At best they only lease it for a max of about 75 years give or take.

[civilized]

Somebody else posted that they tried to make renewal of the lease conditional on payments but backed down in the face of protests.

[unicornmama]

~96% of us humans don't live in America, most of us don't have 30 year mortgages.

[thriftwy]

I'm pretty sure large portions of Latin America, Europe, ex-USSR and perhaps India/South East Asia have 30 year mortgages.

[CapricornNoble]

Also Japanese mortgages are 30 years, or even 50 years. But the interest rates are <1% here.

[ethbr0]

But doesn't Japan also have some weird customs/rules around housing stock age? I remember reading that most things get torn down and rebuilt at 20(?) years max for {reasons}?

[bobthepanda]

In previous generations it was because

- there was a postwar housing shortage, so the housing quality that came up to meet that demand quickly was not good. even if the house is still maintained well (a later point), japan has seen meteoric rises with living standards over the past 100 years, so it probably isn't compatible with modern wants and needs

- Japanese earthquake codes were regularly revised until 1981 after lessons learned from disasters. buildings from before that time have a significantly higher rate of collapse during earthquakes, so buying one and keeping it is a bit of a gamble on your life

- because of the depreciation, there isn't a lot of incentive to maintain your house well to the point where it can last more than 30 years

of course, all these things might be less true now that Japan has stagnated since the '90s, so there are reports of more people accepting renovating a house they buy rather than tearing down.

[unicornmama]

No we don’t. You get 5 year fixed, 10 year max. Beyond is prohibitively expensive.

[thriftwy]

How expensive are we talking about?

Of course people tend to pay mortgage early to avoid paying many times over at 10%.

But, having small montly payment helps in case you have some temporary financial emergency.

[mysterydip]

Just curious what your monthly payments are like compared to your income.

[refurb]

I think people are confused by the term (length of fixed rate) versus amortization (total time to pay off debt).

In Canada mortgages are typically 25 or 30 year amortization periods, but you can only fix the rate for 10 years (usually less as you get a much lower rate).

After the 5 years you renew your mortgage at the current interest rate with the same bank, or try and refinance entirely which requires the same paperwork as a new mortgage.

The US and I believe Netherlands are the rare countries where you can get fixed rate for the entire 30 year amortization period.

[WheatM]

30 year mortgage are normal in New Zealand and Australia, as well as the UK and at least some parts of Europe.

[robocat]

You are confusing a “30 year mortgage” with a “30 year mortgage”. They sound the same, because they have the same term to repay the principal, but they are completely different because in the USA you usually know your repayments for the next 30 years, but in many other countries the repayments can go up a lot if interest rates rise.

In the USA, the usual mortgage has a fixed interest rate for the term of the mortgage. In New Zealand the interest rate is approximately a floating (edit:variable) rate over the 30 year period.

In NZ the mortgage interest rate (which controls your repayments) can be fixed for up to 5 years (the median is 2) but after the “fixed” period the interest rate resets to the current interest rates (edit: typically mortgagees lock in a new 2 year “fixed” rate at the current 2 year interest rate). NZ rates were around 2% to 3% since 2008 [1], but now they are closer to 6% [2] and most mortgage holders in New Zealand will have to pay twice as much for the interest component of their mortgage repayment, putting some people under financial stress (an acquaintance is being forced to sell an investment property because they were over-leveraged). The mortgage interest rate over the 30 year term is more of a stepwise approximation to the floating interest rate: I am unsure how much control the mortgage holder has over varying the principal repayments (I think I can pay 20% more principal per payment, shortening 30 year term to 24 years).

It is more complicated than that, and the USA has a wide variety of mortgage products you can buy including ones similar to NZ (not just the usual USA fixed rate 30 year). Other countries have their own quirks, so I am only speaking for NZ where I understand the details better.

[1] https://tradingeconomics.com/new-zealand/interest-rate

[2] https://www.interest.co.nz/borrowing

[viraptor]

> confusing a “30 year mortgage” with a “30 year mortgage”

No need for confusing naming. You're talking about fixed rate, variable rate and short period fixed rate mortgages.

[robocat]

I expect the meaning taken by the average person in different countries varies, without much overlap. My point is that mortgage products are very different in different countries, and the average person is very unfamiliar with the differences. Perhaps you are technically correct (the best kind of correct!)

For example, in Australia and NZ a “fixed rate”[1] mortgage is not the same as what you have called a “fixed rate” mortgage. Australia looks like it offers up to 10 years at a fixed rate on a 30 year mortgage (ANZ? some banks like Westpac only offer 5 years?). Banks in NZ offer up to 5 years, even though they are mostly Ozzie banks. Ozzie banks typically offer something called offset mortgages - that word doesn’t get used in NZ at all AFAIK (instead NZers can apply for a seperate revolving mortgage, I haven’t seen it bundled like in Oz).

What you call “variable rate” is called “floating rate” in New Zealand (and search completion hinted maybe the same for Canada & Singapore).

It is confusing.

[1] https://www.loans.com.au/home-loans/everything-you-need-to-k...

[benjaminwootton]

It’s even weirder in the UK because you agree a mortgage did say 30 years on a “standard variable rate” but then take a mortgage for say 5 years on a fixed rate or discounted “variable rate” which might last for 2-5 years. People do usually take a new “mortgage” after each period.

Weird!

[netheril96]

All the new mortgages in China have floating interest rates.

[dialogbox]

It does look like a Ponzi. Aren't there any regulations to prevent that?

It's pretty similar to Korea until the step 3 but we have some safeguards after that.

Instead of giving money directly to the development corp, we give it to a trust corp. And the dev corps can only use the money to build the building.

And if the dev can not meet the due date and if it is delayed more than 3 months, the contract can be cancelled and the owners can get the money back.

That very rarely happens because dev corps desperately meet the deadline regardless of the quality. That causes hell lot of another issues but that's totally different story.

It seems to me like there are many things missing in the Chinese real estate system. Or is it just because no one cares the regulations?

[ganyu]

It is because the people who do the regulations are the people who are regulated. It's like having a root user set up a SELinux policy for himself.

[netheril96]

There are regulations but badly designed (maybe intentionally). For an analogy to the Korean case, here the dev corps and trust corps and the government entities overseeing them are more often or not in collusion together.

[y04nn]

The pyramid can keep growing while your population is increasing, but that is not the case in China, the fertility rate seems low and its population is shrinking [1].

[1] https://www.bbc.com/future/article/20220531-why-chinas-popul...

[differentView]

>4. Citizens pay up to 40% of the total price on their own, and ask the bank to lend them the rest of the 60% and get it paid back in the NEXT 30 YEARS (often paying as much as twice as the original price).

So they're less leveraged than most American home purchases of 5~20% down payment. 30-year mortgages are also standard in the U.S. You emphasized "NEXT 30 YEARS". Do you think it should be longer or shorter?

>5. The bank gives 60% directly to the real estate corp. So in fact the citizen IS OWING MONEY TO THE BANK, and not to the estate corp.

That's how mortgages work. Why else would a bank be involved if the money is still owed to the seller? Do you think mortgages shouldn't be a thing, that people should save up 100% of the money then pay in full when purchasing a home?

>6. Often, the real estate corp uses this money to pay back previous loans, or use this money to purchase more land from the local govt. So current (future) constructions pretty much depends on whether this Ponzi scheme could continue.

You keep describing how this works in most places as if it's something outrageous.

>8. ...until no typical citizen will be able to afford it.

We're way ahead of China getting to this point here.

[bobthepanda]

Well, there is evidence in China that the current system is super over-leveraged.

Evergrande and a few other developers have gone bust and left these pre-sold apartments unfinished. So now the people who bought real estate of any kind are getting spooked, and this is basically a bank run, but on real estate.

The Great Recession was bad, but all those houses existed. Which seems a bit better than this present failure scenario.

---

As far as affordability, price to income ratio in Shenzhen is 36:1, as opposed to the highest house price to income ratio in the US being LA at 13:1. China is in an unaffordability class of its own.

[chii]

> So they're less leveraged than most American home purchases of 5~20% down payment.

the american home is already built (mostly), for such a down-payment. The bank takes the home as collateral.

If it was an off-the-plan purchase (which is what the OP described), you don't really pay the full amount, but just a deposit (like 10-20%). The risk of the development falls solely onto the developers, not the buyer - the deposit is held in escrow, not used for funds to pay for construction or other developer activities.

> You keep describing how this works in most places as if it's something outrageous

that's because it is, when you compare it to western developments. The risk in real estate development in china lies solely on the buyer, and it's absolutely not the case in the west.

[manquer]

It is not typical in the western markets, but this kind of practice is fairly common in many markets. For example in India it works the same way, and most times the down payment is only 10%-20% or less. Generally the banks don't release parts of the money to you/developer unless certain milestones are complete. [1]

The practice of advancing money before construction completes, reduces the price for the buyer as already built properties sell for much higher than buying early. So buying early is way to buy a house when the prices are already out of reach for most. It can work if the project and financing is well regulated by the banks.

The property is cheaper[2] because these risks of delays, developer not finishing, not getting approvals so on exist and in theory is factored into the price, along with hedging future inevitable price increases.

[1] Indian real estate is by no means healthy and has its fair share of problems with these practices and delays, but not close to China's scale.

[2] In theory the risk is exactly matched by discounted price, but in practice seller will usually price it a bit higher than the value warranted by the risk factors. Also on average while it may work out, individual buyers may loose life savings as they are betting the farm literally when any specific purchase goes sour.

[throwoutway]

3 4 and 5 sound basically like the US except less than 20% down (sometimes 5%)

Why are you capitalizing owing money to the bank. That’s how mortgages work pretty much everywhere

[itronitron]

9. Apparently banks in China are blocking people from removing money from their accounts.

[rfoo]

It is not yet a widespread thing. For now.

Also, there is no evidence that the disappeared money goes into real-estate/local govt, though it is plausible.

[CoastalCoder]

Aside from the fact that this is a pyramid scheme, it sounds pretty similar to how it works in the U.S. when building a new house.

[ratsmack]

Three years ago I built a house to sell (I was general contractor) on a city lot my family owned. Before a single shovel of dirt was turned over, we had to pay around seventy thousand dollars for plan review, power connection, water, sewer and gas.

This really opened my eyes as to how much mitigation costs have risen over the years. I had built a house in the same area in 1989 and the initial costs were one tenth of that.

[everybodyknows]

Seems a punitive tax on the entrepreneurial middle class. Such fixed costs might be insignificant for a palatial home. At the other end, large-scale developers know all about negotiating discounts and otherwise offloading costs.

[prox]

There was a great article on this system, basically to build a house you need to have so much skill to navigate the maze of red tape, rules and regulations and so on.

[manquer]

That is true for every field, the skills required to do anything is increasingly specialized.

My grandfather became a pharmacist by simply apprenticing to one and then later owning a pharmacy. My mom had to only do a 3-year course, today it would be lot more difficult than that.

You can call it red-tap or code, we have learnt a lot over the last centuries, we put these regulations to protect the average consumer. Sometimes it is overkill, but most regulations have been payed for in blood. Aviation is very visible example.

[bigcat12345678]

> That is true for every field, the skills required to do anything is increasingly specialized.

I think OP's main point is that the majority of the regulated process is not necessary for his project. I would guess OP went through the whole process, and felt that the checks and examinations probably did not do much good to himself or the future home buyers. Thus the outrageous cost becomes an issue, because with the cost, the value is not justifiable.

As for pharmacist, I would totally agree that modern medicine is exponentially more complex than 30 years ago, and that's in a good way: the mechanism of how the medicine works are more advanced, variety increases exponentially, cost is down and more people are using more medicines.

Comparably, building a house has not been much different than what's in 1970s. Aside from newer materials in components, the house building is largely equivalent to what's in 1970s. I got this impression from my own house that is built in 1972, and watching the new building materials been used now on YouTube.

[zo1]

Did most of that money go-to or was mandated-by your local government?

[bombcar]

Lots of it is a tax on non-residents; because other tax forms are kept low but nobody "pays" for the permit costs, etc (it's wrapped in the cost of the house).

[ratsmack]

Pretty much, yes.

[treeman79]

I briefly was looking at getting some cheap land in Tennessee get utilities and a trailer to live on to save money.

Was Shocked at connection cost for everything

[bombcar]

The US will often have guarantees on a construction loan, and sometimes the bank will even inspect the property as it is being built and only release funds when certain points are hit - 30% to start, 20% when foundation is poured, 20% on framing, 30% on completion. And then the loan will be refinanced to a traditional mortgage (construction loans are usually short-term and higher rate).

Many builders will therefor "self-finance" and sell the customer a "built home" direct into a normal mortgage.

[fma]

What happens after 70 years? Especially if the lease isn't renewed.

[ganyu]

Legislation states that the lease is automatically renewed (40yrs, 50yrs or 70yrs depending on how the land was purchased) for residential housing, but there have been rumours saying that related laws will change so the property will be taxed during renewal.

Considering that commercial housing started in PRC in the 1980s and the first batch of houses aren't technically expired yet, I think it's pretty hard to say what exactly will happen.

[yorwba]

Wenzhou had 20-year land leases and originally planned to charge a third of the value as a renewal fee when the first ones began expiring in 2016, but ended up waiving the fee after protests. https://www.mingtiandi.com/real-estate/research-policy/china...

[chii]

by deliberately leaving the regulation vague, the CCP is able to use this regulation as a form of control over the populous.

Come the 70 yr renewal, if there are citizenry who are attempting to disrupt the power structure of the CCP, they will be the first to lose their lease (or some other method such as a high tax which is equivalent to losing the lease).

Mark my words. Regulation that is not fully well specified, and enforced universally, is basically just a political weapon.

[manquer]

"Well specified" regulation is also a weapon. No law is fully unambiguous, clear and without conflicts with other laws for a specific situation, more well specified a regulation is, more you need professional expertise to decode, understand, implement and certify it.

[refurb]

To add on top, there are very few trustworthy investments available to citizens.

Real estate is one of the few assets that is quite secure when it comes to ownership.

Other Asian countries are similar. It’s why your average house in Saigon is more expensive than San Francisco despite a per capita GDP that is < 1/10th that of California.

[renewiltord]

Interesting. I wonder why the UK (which also has no ongoing property tax - just stamp duty) doesn't run into the debt problem. Perhaps, it's just that the country got rich during the period when the government was heavily involved in all that.

[bogomipz]

>."1. Local govts are in heavy debt and sell land to pay back their debt."

What is the source of the debt, is it bonds, do they just run a deficit, something else?

[chii]

> the source of the debt

paying gov't workers (as well as any outstanding debt from previously), services and such.

from what i heard, the local gov't is only paid some 40% of their required budget from the central gov't, and they have to make up the short-fall themselves.

[bobthepanda]

Basically, and also hands are tied as to what taxes can be levied locally.