Apartment buildings under construction in the Kangbashi district of Ordos, one of China’s notorious ghost cities.
Bloomberg Apartment buildings under construction in the Kangbashi district of Ordos, one of China’s notorious ghost cities.

There are more people in Kangbashi now than when I first wandered its vacant streets four years ago. Back then, news stories had started to herald it as a modern-day ghost city, a failed attempt to create a Chinese version of Dubai. The negative media attention spurred then-Premier Wen Jiabao to order the local government to relocate offices there, a transferred worker told me when I made a return trip to Kangbashi in April. A district in the city of Ordos located about 470 miles west of Beijing, Kangbashi is fed by coal and rare earth mineral mines from the surrounding Inner Mongolian desert. But as I discovered, the place remains skin-crawlingly creepy—simultaneously the fastest-growing city and the emptiest one that I’ve ever seen, where the people seem outnumbered by surveillance cameras. “It’s one of the safest cities in China,” says Gao Feifei, a young accountant living in an apartment allocated by her government job.

There are more empty buildings than ever. Rising out of the desert is a forest of 180 half-finished apartment towers, each 20 stories tall. The development is named Civil Servant, appealing to the dream of becoming a scholar-bureaucrat in the Confucian tradition. Its apartment prices are down by more than a third, with a parking space thrown into the deal. But there’s not much incentive to live there. “There’s no place to buy even a bottle of water,” said Chen Jun, a nearby hotel manager.

For those with more political ambition, a few miles away sits a gated community of two- to four-story villas. Less than one in 10 is inhabited. They are in walking distance of five massive city government office buildings, which occupy the only populated part of town. Chen says that even the real estate agencies have disappeared, because no one is buying. When I looked for one, people pointed me to two billboards with pasted-on advertisements.

Kangbashi brought tremendous job opportunities for architects around the world, who flocked here to design homes and civic buildings. Howard Jiho Kim, age 24 at the time, came from the United States in 2007 to work with MAD Architects in Beijing. MAD was commissioned to design the Ordos Museum, which houses a mix of artistic artifacts and anthropological dioramas. The museum was one of the first buildings to go up, sited on a huge square in the center of the city.

The deadlines were astonishing. The museum’s exterior skin was already under construction when Kim was given three days to design the interior. Still, the project was a great opportunity for Kim—the largest thing he had worked on up until then—but he seems a little wistful now. He hasn’t been back to see it completed. “Huge spaces without much inside—it’s a very sad thing for an architect,” he says. “Even if the building is amazing, if no one uses it, what’s the point?”

The museum, a metallic, globular mass, was inspired by Buckminster Fuller’s work, Kim says. “It’s quite alien, which was unavoidable. In architecture, what’s important is the context. But when we first visited, it was all just barren land. How do you build a city from nothing? That’s what’s happening all over China. It’s a city from zero.”

The Ordos Museum, designed by MAD Architects and completed in 2011. The building was intended to be the centerpiece of Kangbashi.
Iwan Baan The Ordos Museum, designed by MAD Architects and completed in 2011. The building was intended to be the centerpiece of Kangbashi.

Ordos’s Kangbashi district—a white elephant in a windswept desert—is an extreme case. But China’s real estate boom has been fueled by unusual policy at the local and macro levels. The conventional wisdom is that China’s Communist Party adopted capitalism wholesale. In fact, most of the economy is still state-run. And real estate, an officially designated pillar of the economy, in particular, feels the heavy hand of government policy. The question is: Have those policies helped create a massive bubble?

“I see Ordos as simply a more flamboyant example of dynamics that pervade China’s real estate market across tiers and regions,” says Patrick Chovanec, chief strategist at Silvercrest Asset Management, a New York–based investment adviser. “The issue has never been a lack of people with desire for better housing, but whether they could afford the homes that were being built, purchased at high prices, and held as investments in anticipation of such demand. There is, no doubt, some market clearing price at which all the houses in Ordos would be filled. The question is then, what is that price, and what kind of losses does it imply for developers, investors, banks, and local government?”

The bears foresee a ripple effect that would destabilize the entire system. China’s economy may be “caught up in very powerful feedback loops,” according to Michael Pettis, professor of finance at Peking University. “In the early stages of a growth miracle, we are always surprised,” he wrote on his blog. “Growth far exceeds even our wildest expectations. Once the economy begins to slow, however, we have also been—in every case that I can identify—shocked by how vicious the slowdown turned out to be.”


What’s obvious now is the disconnect between supply and demand. On the demand side, China is experiencing the biggest urbanization in world history. Some 400 million people are projected to become city dwellers over the next decade. Most of them would be happy to own a modest home with a private toilet. On the supply side, countless luxury apartments sit vacant as investment properties. (Most of the new residential construction in major cities has been targeted to the luxury market.)

Not all economists envision worst-case scenarios for the real estate market. “There are bubbles in some Chinese cities, but to say that the whole of China’s property market is a huge bubble is another big overstatement, in our view,” wrote Ting Lu, Xiaojia Zhi, and Larry Hu, Chinese economists at Bank of America Merrill Lynch, in a March report titled “Demystifying China’s Ghost Towns.” They continued: “Home prices are not cheap, but neither are they exorbitant in most parts of China.”

For instance, Beijing’s house price-to-income ratio, which compares the cost of the typical house to the average annual household income—is among the highest in the world. According to the International Monetary Fund, Beijing’s ratio is more than 22.3, compared to 6.2 in New York City. In Beijing, Shenzhen, and Shanghai, real estate prices are still rising, up more than 3 percent in February compared to one year earlier. But nationwide in China, the house price-to-income ratio was a little more than 7 in 2010, which seems reasonable to many economists.

Nevertheless, if the bubble metaphor proves accurate, what a ferocious bust it would be. U.S. housing prices rose 84 percent between 2001 and 2006, before the real estate market crashed. China’s housing prices rocketed 250 percent between 2004 and 2009.

The company with the most skin in the game also seems the most pessimistic: “Winter in the real estate industry will be here for the long-term,” wrote Yu Liang, the president of Vanke, China’s largest residential real estate developer, in a column for Caixin magazine. “It is difficult to see an end.” Vanke just bought a 70 percent stake in Tishman Speyer, the biggest commercial property developer in the United States. The next frontier in Chinese real estate, at least for Vanke, is outside China.

China's rise in housing prices has far outpaced the recent U.S. bubble.
Catalogtree China's rise in housing prices has far outpaced the recent U.S. bubble.

China’s market isn’t governed by the same policies as the American market. For example, homeowners aren’t charged annual property taxes. Instead, local officials’ salaries come almost entirely from land transfers, which make up about 70 percent of the revenue of cities, towns, and even counties across the country. That’s quite an incentive to sell land and keep developers in business.

On the demand side, social factors may take the blame. According to traditional gender roles, women expect their future husband to own a home—and avoid marrying anyone who doesn’t. There’s a saying that despite the laws requiring monogamy, the reality is not one wife per husband, but one wife per house. It’s even blamed on mothers-in-law: the so-called “mother-in-law demand,” in which the hypothetical fiancee’s mother insists on seeing the deed of her daughter’s suitor’s house. Sociologists have disproven this cause and effect. It’s rare to find a woman who decides her life partner based on him owning a house. But fear tactics, in propaganda and advertising, support housing demand anyway. For example, parents may buy their son a home out of fear that he’ll otherwise remain a bachelor.

The strongest driver of demand remains economic policy. The government, to boost economic growth, pushes interest rates so low that they are negative. Left in an account at state-owned banks—the only legal banks in China—savings don’t even keep up with inflation. There are few other low-risk investments for the average person. The stock market, for one, is too new, unpredictable, and corrupt—and besides, it’s mostly restricted to state-owned companies. Real estate, by comparison, seems like a safe bet.

Meanwhile, Shanghai and Beijing officials often announce efforts to tamp down prices. At least one of the government’s own think-tanks, however, call such efforts half-hearted. The China Center for International Economic Exchanges said in a report in April that the central government’s latest measures to control the real estate market, by raising mortgage downpayments and barring people from buying second homes, would “possibly, in part, come to nothing.”

Indeed, for all its talk, the government hasn’t taken its foot off the gas pedal, and has kept interest rates low. Likewise, local governments still depend on selling land just to pay their own salaries and keep schools running. The central government clearly knows that if and when the real estate market does collapse, local governments may go down with it. Since a huge chunk of state-owned bank loans are to local governments and property developers—more than 20 percent of bank loans combined—if real estate prices plummet, the Chinese Communist Party itself could face a significant crisis. Rather than changing policy, some party officials are investing their own money outside of China, in a widely known and sometimes illegal exodus of capital.

Real estate prices in Beijing, Shanghai, and Shenzhen have continued to rise in the last year even as fears of a possible bubble have grown.
Catalogtree Real estate prices in Beijing, Shanghai, and Shenzhen have continued to rise in the last year even as fears of a possible bubble have grown.

Firms and independent architects from around the world flocked to China in the lead-up to the Beijing Olympics in 2008 and the Shanghai World Expo in 2010. Even more arrived as the financial crisis halted development in the rest of the world. Today, architects say there’s about half as much work available in Beijing as during the height of the boom. But in smaller, less prestigious, so-called “third-tier cities”—of which there are practically too many to count—the government is still investing in architecture. Tianjin, Chengdu, and Xi’an are prominent examples.

“They have designs to become second-tier cities,” says Kim, and they plan to do so by building CBDs, or designated Central Business Districts. That means designing an entire business center from scratch—usually finding an area near the city center, building tall, landmark towers there, and trying to attract major banks and corporations.

“In post-Olympics Beijing and post-Expo Shanghai, there are fewer opportunities for foreigners,” says Jeffrey Johnson, director of China Megacities Lab, an experimental research unit at Columbia University’s Graduate School of Architecture, Planning, and Preservation. “There’s a tendency to hire more local firms rather than international. China is keeping many architecture offices operating around the world, but it’s more difficult to get a foothold now. Boom markets are moving westward, and those projects are going more to Chinese firms.” He rattles off Chinese firms to watch: Neri & Hu, MAD, Studio Pei-Zhu, Urbanus, Zhang Ke’s Standard Architecture—and of course, Amateur Architecture Studio, headed by Wang Shu and Lu Wenyu.

Even in the middle of a project, some clients change their minds about working with foreign architects, in light of Chinese architects’ lower fees. HHF Architects, based in Basel, Switzerland, was half done with a house in Yunnan when that happened. “The client couldn’t understand why we were more expensive than Chinese architects, and we couldn’t make him understand that quality takes time,” says HHF partner Simon Frommenwiler. “The house is empty. Trees are growing over it. It looks like the temples in Cambodia.”

Many firms are branching out. Roberto Bannura is the Beijing director at Steven Holl Architects, best known in China for residential properties such as Linked Hybrid in Beijing, eight housing high-rises connected by colorful bridges. “Housing has slowed down,” Bannura says, “but I don’t see much of a downturn in commercial and office buildings.” Still, the market is tighter. “Since late 2010, we perceive less opportunities. There’s a lot more people working here, more architects coming from abroad, setting up their business here. So it’s a double whammy—additional competition and less opportunity.”

Holl's firm hasn’t had to lay off any architects in Beijing; it is one of many firms getting business from a current boom in museum design. In the coastal city of Tianjin, Holl is building an ecology museum as well as a planning museum, both to total about 650,000 square feet. They are like 3D puzzle pieces side by side; one is the inverse of the other. They will be seated in the newly designated eco-district, alongside a new library and opera house. “That’s five or six brand-new buildings,” Bannura says.

In 2011 alone, 390 new museums appeared in China, according to The New York Times. The boom has been fueled by national policy and government investment, not a surge in nonprofit support for art and history. In fact, nonprofits are mostly illegal in China. The central government has a goal of about 100 new museums per year, Bannura says. It’s all out of nationalistic ambition to compete with the museum-rich nations of the developed world. Real estate developers have financial policy incentives to insert museums into their projects.

There are other growth areas, too. Michael Tunkey, a principal at Cannon Design, a leading designer of healthcare projects, says his business is still thriving. He is designing a large public hospital on the tropical island city of Haikou, and a small private hospital in Shanghai. “The government cleared the way for private foreign investment in the private healthcare market, while simultaneously pouring government funds into the public healthcare system. This has opened the floodgates for development.”

The Chinese Real Estate Information Corporation, a leading consultant, identified the top 20 markets that are most at risk for a significant crash in real estate prices.
Catalogtree The Chinese Real Estate Information Corporation, a leading consultant, identified the top 20 markets that are most at risk for a significant crash in real estate prices.

In any area, one thing is clear to architects working in China: their opportunities are vulnerable to political relationships. Developers need guanxi, connections, to get the land in the first place—that’s their highest hurdle in any project. After that, if political relationships sour, construction halts.

“Things happen in China. Mayors are arrested. Clients disappear,” says New York City–based architect Dan Wood, AIA, a partner of WorkAC. “If you’re lucky, you get paid for 75 or 80 percent of your work.” In 2008, Wood was one of the foreign architects hired, along with Ai Weiwei, by tycoon Cai Jiang for a project called Ordos 100. As suggested by its name, the idea was to build 100 houses in the desert. The plans shriveled after the mayor was replaced. “It died a slow death,” says Tunkey, who also worked on the project. “By the time of Ai Weiwei’s arrest it was definitely over.”

Now just a few shells of houses are left in the desert, not far from the ghost city of Kangbashi—omens, perhaps, of the impending bust.