[kortilla]

If those buildings are “useless”, how is the developer going to make money on it? That doesn’t pass a basic smell test.

Your example about China is pretty bad. They moved most of their population into cities over the past 50 years by massively building housing and making it affordable to their middle class.

Young people struggling to afford their own place in a tier 1 city in China is not evidence of it failing, it’s evidence of tenants being picky.

China’s housing has also had several bust cycles where the prices came down. Government intervention and bailouts prevented it from being as obvious, but supply and demand most certainly work.

[roughly]

> If those buildings are “useless”, how is the developer going to make money on it? That doesn’t pass a basic smell test.

By selling them to someone else who intends to sell them to someone else, just like every other commodity on the market. Real estate as an investment is less a bet on rents and more a bet on land value.

[actionfromafar]

Which is why we need a land value tax.

[kortilla]

That’s some stupid shit. Nobody will pay money for it that can’t be supported by rent prices to float the mortgage.

Think through stuff more before you post this.

[roughly]

If they expect the rate of return to exceed what they could get elsewhere, of course they will. Depending on what the investor expects to happen to land pricing, the math can pencil out just fine on letting an asset sit until someone's willing to pay enough for it. There's no deeper story here - invest X on the assumption it turns into Y, where Y is sufficiently larger than X to make it worthwhile. The fact that it's housing, as opposed to bonds, futures, paintings, crypto, whatever, is an interesting fact, but not really one that's relevant from a finance standpoint.

[Tade0]

> That doesn’t pass a basic smell test.

How do people make money on crypto? Just sell it to another sucker. I've seen listings titled "Sale! Ten studio apartments!" - someone was literally selling all of them in one go.

Among the upper middle class around here it has become fashionable to have real estate investments - interestingly since recently also in Spain - because it's seen as a safe bet and, gradually, the default.

As for China: over 70% of household wealth there is tied to real estate. Compare that to the US, where it's less than half of that and even if you assume pension funds pour all their money into real estate, it's still less.

All those busts didn't decrease prices long term. Someone holding on to their housecoin through these cycles would still stand to gain.

[drdec]

> As for China: over 70% of household wealth there is tied to real estate. Compare that to the US, where it's less than half of that and even if you assume pension funds pour all their money into real estate, it's still less.

That feels wrong. For most households, their biggest investment by far is their house. Few households which do not own a house have any kind of investment.

So if only 35% of all household wealth is in real estate, I would wager you have some outliers skewing the numbers (i.e. billionaires).

(This is not a criticism, just trying to reconcile the numbers)

[kortilla]

> How do people make money on crypto? Just sell it to another sucker.

Great example! What’s the value of the Hawk Tua coin?

>All those busts didn't decrease prices long term. Someone holding on to their housecoin through these cycles would still stand to gain.

Bullshit. There are ghost towns all over the US where that didn’t hold. Significant portions of non-arable land don’t keep up with inflation.

Even a place in Detroit bought in the early 2000s has not even close to recovered inflation adjusted.

[thrwwyfrobvrsns]

If those buildings are “useless”, how is the developer going to make money on it?

>Build for $1 mil.

>"This building is worth $2 mil! Give me a loan with it as collateral."

>Use the $2 mil to invest in something else.

Rinse and repeat. This is also the reason why CRE valuations have hardly fallen despite WFH et al. Everyone involved understands that valuations cannot fall, because more than the value of the buildings in question hangs in the balance.

[kortilla]

I don’t think you thought this through. The building is only worth $2 mil if there are people paying rents for the cumulative similar units.

A bank will absolutely not give you a loan for $2 mil on a regular residential building unless there is supporting evidence for the market bearing in that. It’s far too much of a risk for the bank otherwise.

I think the gap in your mental model is that you think banks agree to owner valuations and fork money over without a second thought.

[thrwwyfrobvrsns]

Oh, that's easy:

>Builder sells n/m units at a convincingly fast rate; values rest of building based on these sales

>Bank gives the loan and then sells it to a third party

>Sales volume drops/rent drops/comparables drop (it was a bubble all along)

>Bank doesn't care, it sold the loan

>Builders don't care, owners and execs have already extracted personal spoils; sell the building at a loss, declare bankruptcy, walk away

https://www.nortonrosefulbright.com/en/knowledge/publication...

I think the gap in your mental model is that you think that these businesses have any scruples whatsoever. Banks will absolutely agree to improper valuations if it's to their strategic advantage. Realize that collateral has to keep its value over the length of the loan, but banks are lending based on the current/projected value of that collateral during the time that they expect to hold the loan. If they can clear the loan from their books before the collateral value drops, their risk is low; they will make that loan.

[kortilla]

It has nothing to do with scruples. It’s all about risk and the ability to sell the loan.

The bank cannot sell off a $2 million loan that is upside down a million.

[thrwwyfrobvrsns]

And I just explained how the risk is "low". The loan is not upside down when they sell it; they have nominal proof that it's "worth" $2 million (through dubious valuations, because it's in everyone's interests to pretend that that that valuation is solid (this is where scruples come in).

You also do not have to take my word for it since I cited one example of many where this actually happened.

Update your previously inaccurate world view, please.

[kortilla]

The entity purchasing it has to think they can get the asking price for it.

The bank will not take the risk acquiring it unless they think they can actually sell it for that.

So if the bank thinks they can actually sell it for $2 million and it is selling for $2 million, you’ve just described a $2 million property.

What I’m telling you is that those buyers disappear at any large scale because buyers of buildings like that need ROI. It’s only in really hot markets where deep wallet flippers will tolerate taking a bet on a building that cannot generate revenue to support the note.

What you linked to is a rare case. It doesn’t happen at scale because the system doesn’t close.

[seanmcdirmid]

Chinese housing does not become cheaper during bust cycles. Instead, sales volume falls via sellers reluctant to sell and real estate companies (mostly owned by red families) reluctant to advise lower prices and less motivated to show property that is priced less. It’s an incredibly distorted market for sure, and it’s not just first tier cities that are expensive (my partner owns a villa in a tier 88 that’s supposed to be half a mil).

Unrenovated flats are mostly there for speculation purposes, think of them as gold to be traded rather than something to live in.