• Wednesday, October 14, 2015

Housing bubble in Inner Mongolia's Ordos bursts

Shih Jui-te and Staff Reporter 2011-07-11 08:40 (GMT+8)
A residential area in Ordos, Inner Mongolia, which has seen its property market plummet, making a ghost town of a newly built district. (Photo/CFP)

A residential area in Ordos, Inner Mongolia, which has seen its property market plummet, making a ghost town of a newly built district. (Photo/CFP)

A property boom in the Chinese city of Ordos started in 2006 but became stagnant this year after banks tightened credit and coal enterprises in the region have consolidated.

Ordos, a city in central-west Inner Mongolia, has rich deposits of coal and oil. A recent report by the Ministry of Housing and Urban-Rural Development showed that the GDP per capita of Ordos has now surpassed that of Hong Kong.

The number of the rich people with more than 100 million yuan (US$15.7 million) is over 7,000. One out of every 15 people in Ordos has more than 10 million yuan (US$1.57 million). Those who have assets worth only one million yuan (US$157,000) are considered poor.

With so much wealth floating around, housing prices have skyrocketed. According to the Nanfang Weekly, this third-tier Chinese city once had real estate prices that averaged 7,000 yuan (US$1,100) per square meter.

Several buildings sold recently for as high as 13,000 yuan (US$2,040) per square meter. Home prices in Ordos have climbed to over half the price in Beijing, one of China's most expensive property markets with an average of 22,914 yuan (US$3,595) per square meter.

The boom came as wealthy locals sought investments after becoming rich quickly from coal development.

However, since February home sales have stalled, with only around 10% of properties on the market being sold.

The reason behind the sluggish trend lies in the tightening of credit by banks and more importantly the merger of coal enterprises.

A lot of the demand for real estate is fueled by the coal business, but this year, Chinese conglomerate Ordos Group wants to focus on coal industry restructuring. Thus, the consolidation of the group's coal companies will result in a decrease in the number of companies from the current 300 to 40 by the end of the year.

Some small coal mines have had to cut their property prices because they could not afford to pay interests on loans from banks while their operations are being suspended.

In addition, underground financing is rampant in Ordos. Every housing project has to seek funds from the private sector, which has taken a 40-50% share of the lending market.

A developer in Ordos said that some in his industry have invested all their money into real estate. Now, with new homes still being built, developers must pay their bills monthly, but since they cannot sell the properties they are forced to continue to dump in money. Once banks refuse to offer loans, they have to borrow from the private sector, forming a vicious cycle of dependency.

Kangbashi, the well-known ghost town of Ordos, represents the epitome of China's housing bubble. The new town, which cost 17 billion yuan (US$2.667 billion) to build, was originally intended to become a city with a population of around one million, but the number of people actually living there is less than 20,000.

Local media have described the town as "quite barren, with only a few vehicles passing through the multi-lane highway. Some government offices open in the daytime. Pedestrians that appear every so often look like illusory beings, dragging their heavy feet along like a lone survivor after a catastrophic event from the movies."

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Hao Peng (郝鵬)

Hao Peng is the governor of Qinghai province. Born: March 1982 Birthplace: Fengxiang, Shaanxi province Country of Citizenship: China Education: BA in aircraft manufacturing from ...