The “surge” in property prices in Beijing, Shanghai, and Shenzhen at the beginning of this year was enough to drive one to despair; it felt as if the Chinese economy had completely given up its chance for a soft landing. We all know reform is necessary, but I really do not know where the “turning point” lies. Dragging things on is possible—take North Korea as a reference—but if we really still hope for successful reform, then it is hard to imagine avoiding a collapse. The only remaining suspense is when it will collapse, and who will be the first to collapse.
It’s not that I’m being pessimistic about China. I have always believed that if China’s society and economy are to enter a new era, they must undergo a comprehensive collapse. Only a comprehensive collapse can break the tangled fetters of vested interests and reverse the inertia of all kinds of stale logic. Back when Vice President Li had just taken office, I was for a time full of confidence, believing that someone as wise as Li should know that it was then the best moment to let the Chinese economy crash. Unfortunately, what I eagerly awaited turned out to be the absurd “reform bull market”……
Of course you can oppose my view and say that when the economy crashes, ordinary people are always the ones who suffer most. That is not wrong. But it is like asking whether, for a group of people immersed in drug use, it is better to let them go through a period of painful struggle and force them to quit, or to keep maintaining—and even increasing—the supply of drugs in order to avoid pain. This is a matter on which people may reasonably differ. In any case, as someone who hopes Chinese people will keep rising, I would rather choose the former.
Ironically, many leftists, even Maoists who still nostalgically miss the “Cultural Revolution,” have no awareness at all of the principle of “destroy first, then build.” Let alone political revolution or cultural revolution, they do not even dare speak of economic revolution anymore. All day long they chant that “stability overrides everything,” busy themselves with snuffing out every sign of disorder, and yet at the same time keep shouting the slogan of “reform.” This is simply schizophrenia.
You may say I am being too optimistic, that house prices cannot crash, that one false move affects the whole situation, and so on. But if the reason for maintaining the property bubble is built on the necessity of maintaining the bubble, then does the Chinese economy still have any salvation? Who, after all, is the one being pessimistic? In my view, all those who keep shouting that house prices must not fall, that state-owned enterprises must not go bankrupt, that the economy must not collapse, are the ones truly condemning the Chinese economy. In their eyes, the Chinese economy is like a person terminally ill, unable to be taken off the ventilator and able to stay alive only by continuous injections of morphine. But in my view, the Chinese economy still has hope; it is still not too late to cut in now. Moreover, the new situation of “destroy first, then build” may instead become an advantage.
As for real estate, it too contains room for transformation.
What we now need in economic reform is nothing more than to adapt as quickly as possible to the new conditions of the Internet age. Yet much of the much-ballyhooed “Internet+” everywhere today is merely a gimmick; very few actually embody the disruptive power of the Internet. For example, the flood of “Internet finance” is nothing more than the old pyramid schemes, private fund-raising, and usury having merely opened a website. Internet finance in the true sense is Bitcoin; it is meant to disrupt the traditional financial system.
A truly meaningful “Internet+ real estate” also cannot possibly be there to save traditional property developers. On the contrary, it can only be the result of traditional property developers destroying first and then building anew.
What exactly “Internet thinking” is remains a matter of endless debate, but when it comes to the characteristics of the Internet, there is at least one keyword worth noting: Free—liberty, and free of charge.
Why can a commodity be free? This is something hard for people without Internet thinking to imagine, and even some pioneers of the Internet age could not imagine it. I need not repeat Bill Gates’s old evaluation of open-source software. Why can a software product be free? On the one hand, it depends on the low cost and reproducibility of software; on the other hand, it is also determined by the ecosystem of the Internet industry. In the Internet environment, attracting users is the top priority. All Internet companies at the beginning are always burning money to make noise. As long as they can gather enough popularity, they can always find a way to profit sooner or later. And a company’s profit point is often not at the very entrance, but is developed only after it has accumulated a sufficiently large user base, through all kinds of deep usage and interactive links. So an Internet company, especially a software company, will often make its most basic, entry-level service free, or even pay out of pocket to attract you in.
Portals, search engines, e-mail, and so on, are all free to begin with; the greatest Internet companies, such as Google and Facebook, have their most basic and most popular services all offered free of charge.
In the free economy, Chinese people have also stood at the forefront of the world. Alibaba used free services to sniped eBay; QQ, with the help of free tools, became the most profitable software platform; 360 led the free-ization of antivirus software; WPS led the free-ization of office software. In these areas, people originally thought Chinese companies were just being shameless, but facts have proved that these companies actually had the foresight. Now even Microsoft has begun to make its flagship product Office free, and Facebook also wants to come to QQ to learn the tricks of making money…… (Of course, Chinese people have done rather well with the “free” side of the equation, but the other side, “liberty,” simply cannot get off the ground, and the result can only be a kind of paralysis; but that is a story for later.)
So, can real estate also create a “free” economy? There is great hope! The reason real estate can possibly be free is the same as the reason Internet services can possibly be free.
The first characteristic is “low cost.”
Yes, low cost. Please have readers first put back any teeth they may have laughed out and then listen slowly as I explain.
From the current market environment, real estate’s cost is of course not low. On the contrary, it is frighteningly expensive. The money property developers spend buying land from the government is often even higher than the house prices at which they sell to consumers; this is precisely why, in order to keep the real estate industry from collapsing, house prices must keep rising. But the current high cost is to a large extent attributable to monetary policy and the financial system. The costs required for actually developing property—rebar, cement, and the like—are not high.
Moreover, real estate today is clearly in a state of overstock, that is, supply exceeds demand. That we can maintain supply exceeding demand while at the same time maintaining rising prices—a thing contrary to economic laws—is also thanks to the monetary system, and this monetary system may not be able to last forever (it will be replaced by a genuine “Internet finance”).
After a real estate crash, how should the redundant inventory be handled? Ren Dapao says that some property inventories can only be “blown up”; this is not alarmism. For example, in the Great Leap Forward era, a huge amount of useless scrap steel was produced—how should it be handled? Scrap steel should simply be discarded. Many properties that cannot be sold because of planning mistakes would be better demolished and started over, with the land re-planned for other uses; even letting it grow wild with weeds would at least do some good for the ecological environment.
Economics has a most basic concept called “sunk cost” (all the people whose stocks are “trapped” should study this concept hard). That means some inputs have already occurred because of past decisions; no matter what you do in the future, you cannot change the fact that those inputs have already happened. Therefore, these costs should not be reconsidered in future decisions—I put a great deal into a romance back then, and now the other person has become more and more trashy, with the future looking utterly dark, but because I invested so much I can’t bear to give up; I took the wrong medicine and my body got worse and worse, but that medicine cost a lot of money at the time, what a waste it would be to throw it away; back then I spent 5,000 yuan to buy a piece of junk worth only 50 yuan, and now I have a chance to sell it for 500 yuan—that won’t do, I’d be losing 4,500 yuan!……
In fact, if you sell something worth only 50 yuan for 500 yuan, you have made ten times the money, not lost ten times. As for the loss you suffered, that had already occurred the moment you were cheated out of 5,000 yuan back then. Even if one day you were to sell that piece of junk to another fool for 50,000 yuan, it still would not change the fact that you had already lost money back then. Because you once acted foolishly, must you necessarily stay where you are and wait for the next even more foolish person to appear? That is the economics version of “waiting by a tree stump for a hare” (守株待兔). Maybe you can wait for one, but it is still very stupid.
As far as the real estate industry is concerned, no matter how much the developer originally spent on land acquisition and house construction, once real estate truly collapses, all these properties rotting in hand and impossible to sell are negative assets. Keeping them vacant and feeding them still consumes resources, and taking property tax and management fees into account, it is entirely possible that even giving them away for free will still attract no one (Detroit real estate is already like this). By then, no one will care how much money was invested in that house back in the day (oh, except the bank that loaned you the money).
So, once the bubble in the real estate industry has dissipated, once the costs of real estate follow the basic laws of economics, then because of the prosperity real estate once had, a huge inventory will remain, which will greatly depress the cost of obtaining housing.
This is the benefit of destroying first and then building. But is such a low-cost state sustainable? Some people say that because of trends in population development and mobility, house prices in big cities will always rise. Is that true?
According to the logic of the Industrial Age, yes, it is true, because the basic tendency of the Industrial Age is the rise of megacities and the explosion of population.
But circumstances change. In today’s developed Western countries, both urbanization and population growth have entered bottlenecks. The more developed a society is, the slower population growth often is, and it may even show a pronounced negative growth. China is only now, belatedly, opening up to a second child, but the middle class in big cities simply does not want to have more children.
Of course, compared with the Western world that is “setting in the west like the sun,” poor and backward China still has plenty of room for development, and its urban population still has plenty of room to increase. Yet on the other hand, our real estate inventory is also much larger than the West’s. By the most conservative estimate, the existing real estate inventory is already enough to accommodate several hundred million urban residents; if one counts all the small-title properties and ghost cities and the like, then perhaps several billion people would be needed to fill them.
Moreover, people generally calculate living space at 35 square meters per capita. Then as people become increasingly affluent and living conditions rise, does per-capita housing space necessarily have to grow larger and larger? On the contrary! In my view, it will probably get smaller and smaller.
Young people of the Internet generation no longer need especially large houses. A bed, a bathroom, and crucially wifi—that’s enough. Why need so much space? It’s troublesome to clean too. The kitchen is not needed either; takeout is enough (there was a recent joke that Shanghai people buying a house should not include a kitchen, because the money for those 10 square meters would be enough to eat out at restaurants every day for decades). There are only two or three people in the home, so a small table is enough. Family gatherings are all held in restaurants; there is no need to do it at home at all. If I didn’t have several thousand volumes of books to put somewhere, I too would rather have a smaller house. Of course, as e-books gradually replace paper books in the future, there will be no need for such a large bookshelf either.
More importantly, within ten or twenty years, virtual reality technology will definitely begin to rise gradually. You think the space at home is too small and living there feels cramped? No problem—put on a visor, or lie inside a VR egg shell, or switch on the holographic projections on the surrounding walls. If you want to simulate a beach or a rainforest, whatever environment you want, just download one. How much space does a house really need then? A space about the size of a coffin per person is enough. This does not sound the least bit science-fictional. In fact, even today, without VR technology, I have basically already been able to content myself with curling up in bed all day playing on the computer, let alone the next generation?
Add to this the fact that urban transportation systems can become increasingly perfect, and buildings can be built ever higher, and city areas can expand outward, and so on, and there is no need to be pessimistic about the supply of land space.
Urban population growth is limited; each person’s demand for housing is limited; real estate development has excess. So if one follows the trends of technological development and the basic laws of economics, rather than relying on a monetary system that is already distorted to begin with, then the conclusion is that the “cost” of real estate ought to become increasingly low.
If the cost of a commodity is far lower than the additional benefit the merchant can obtain from users thereafter, then the merchant has reason to provide that commodity for free.
So the second characteristic is that real estate can drive a series of related industries to generate extra value.
Real estate is a bit like the “operating system” in software, or the browser/search engine in online activity. It is the starting point and center of all other kinds of activity. Of course, operating systems represented by Windows are charged for, and very expensive too (though the latest Windows 10 has also begun to be free), while from Linux to the popular mobile system Android, all have taken the path of open source and free use.
Why can operating systems be free? Because merely using an operating system is not enough; you also need all kinds of application software. Google bundles a series of its own software into its operating system, such as the browser, mail, maps, video, social networking, and so on. If you want to use other applications, then you go to Google’s own app market to download or purchase them (of course, all of these are castrated away on domestic Chinese phones). Yet many of Google’s other services are free as well. In fact, Google’s main profit point lies in advertising, and Google’s advertisements excel at precise targeting. How can they become increasingly precise? Because so many people use Google’s search engine, maps, social tools, and so on, allowing Google to collect massive amounts of usage habits. In the age of big data, data is productive force. With the largest database, Google naturally has countless possibilities for mining value from it.
Tencent’s money-making methods are even richer, pushing the advantage of the gateway to its limit. In theory, you can also go play games elsewhere, but entering through QQ or WeChat is convenient and effortless on the one hand, feels reliable on the other, and on yet another hand makes social interaction convenient. Why go out of your way to choose some other platform?
The great Internet companies no longer make money by selling a single product, but by making money from the entire ecosystem. The platform-like, gateway-like services in this ecosystem can be free, or even money-losing, but as long as they successfully gather popularity, they have succeeded. The greater the popularity, the greater the benefit, and the relationship between the two is nonlinear: the benefit produced by gathering 100 people is not merely ten times the benefit produced by gathering 10 people.
Real estate is also such a foundational, platform-like, gateway-like center for people’s lives; around a series of activities centered on residence, countless additional values can be produced.
The greatest value brought by real estate is not the money residents pay to buy houses, but the residents themselves. As long as there is popularity, surrounding businesses, schools, shopping malls, restaurants, cultural and entertainment facilities, and so on will all prosper, and mutually reinforce one another: more shopping malls attract more residents, more residents promote more businesses…… Once the situation is opened up and community development enters a virtuous cycle, a community with a larger number and higher quality of residents will create new value without limit. These virtuous cycles in the real economy are much more substantial than the vicious cycles of money in the financial system.
Earlier, Shenyang introduced a bizarre policy allowing university students to buy homes with zero down payment, but it was urgently halted because it might have bred serious financial risks. Yet at least one idea behind this policy was correct, namely the hope of retaining talent as much as possible. For a city, the old industrial system’s decline is not the most terrifying thing; what is terrifying is that the population disperses, all the talented people leave, and who then will drive economic transformation? But the problem now is that real estate has been hijacked by local governments and the financial system, and they simply do not dare let prices fall, while high house prices are fundamentally at odds with attracting young people.
But suppose real estate were simply given away to university students? Let us assume that the Northeast has already declined completely, the population has all flowed out, and a huge amount of real estate inventory is sitting vacant for nothing. The earlier property companies have all gone bankrupt, and the earlier investments have all sunk costs. Now the new mayor of Harbin thinks he is “trapped,” but he is unwilling to “cut the flesh,” preferring that these unsellable houses rot in his hands; on the other hand, the new mayor of Shenyang thinks that rather than letting houses mold and turn into ghost cities, it is better to give them away, and university students and high-end technology talent can move in free of charge (of course, through technical means, one can stipulate that they must genuinely live there full-time). What would the result be? Perhaps Shenyang still cannot attract university students from Beijing, Shanghai, and Guangzhou, but at least it would be better than Harbin, right? Once popularity is there, how could there still be no tertiary industry? The development of high-tech and Internet industries would at least become possible. Even if these university students are lazy and gluttonous and accomplish nothing, at least retaining the popularity means retaining possibility, at least giving people room to “dream”; otherwise, one could not even imagine what other “turning point” the Northeast still has.
Real estate becoming free—or at least cheaper—is not fanciful talk, but the inevitable trend of the times. Although as a philosopher I should not be responsible for predicting the future, I still could not help but indulge in some speculation. Perhaps you think that, in the end, Chinese cities becoming like Detroit, where houses are given away for free and still no one wants them, is a pessimistic, defeatist view. But I think it is a heaven-sent opportunity, a link in the most optimistic “Chinese Dream,” and may become a milestone in the history of the “city.”
Translated from the Chinese original with AI assistance. The original text is authoritative.
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