China's real estate bubble - CBS News

The following script is from "China's Real Estate Bubble" which originally aired on March 3, 2013,and was rebroadcast on August 3, 2014. Lesley Stahl is the correspondent. Shachar Bar-On,producer.

For three decades, China had been nothing short of a financial miracle: a state-controlled economythat managed to navigate its way out of the tatters of communism to become the world's secondlargest -- deftly managed by government policies and decrees. But now, many in the financial worldare looking nervously at China.

That's because one sector Chinese authorities concentrated on was real estate and construction. Andas we first reported in March last year, that may have created the largest housing bubble in humanhistory. If you go to China, it's easy to see why there's all the talk of a bubble. We discovered thatthe most populated nation on Earth is building houses, districts and cities with no one in them.

Lesley Stahl: So this is Zhengzhou. And we are on the major highway, or the major road. And it'srush hour.

Gillem Tulloch: Yeah -

Lesley Stahl: And it's almost empty.

Gillem Tulloch is a Hong Kong based financial analyst who was one of the first to draw attention tothe housing bubble in China. He's showing us around the new eastern district of Zhengzhou, in oneof the most populated provinces in China - not that you'd know it. We found what they call a "ghostcity" of new towers with no residents, desolate condos and vacant subdivisions uninhabited formiles, and miles, and miles, and miles of empty apartments.

Lesley Stahl: Why are they empty? I've heard that they have actually been sold.

Gillem Tulloch: They've all been sold. They've all been sold.

Lesley Stahl: They've all been sold? They're owned.

Gillem Tulloch: Absolutely.

Owned by people in China's emerging middle class, who now have enough money to invest but fewways to do it. They're not allowed to invest abroad, banks offer paltry returns, and the stock marketis a rollercoaster. But 16 years ago, the government changed its policy and allowed people to buytheir own homes and the flood gates opened.

Gillem Tulloch: So what they do is they invest in property because property prices have always goneup by more than inflation.

Lesley Stahl: And they believe it will always go up?

Gillem Tulloch: Yeah, just like they believed in the U.S.

Actually, property values have doubled and tripled and more -- so people in the middle class havesunk every last penny into buying five, even 10 apartments, fueling a building bonanzaunprecedented in human history. No nation has ever built so much so fast.

Lesley Stahl: How important is real estate to the Chinese economy? Is it central?

Gillem Tulloch: Yes. It's the main driver of growth and has been for the last few years. Someestimates have it as high as 20 or 30 percent of the whole economy.

Lesley Stahl: But they're not just building housing. They're building cities.

Gillem Tulloch: Yes. That's right.

Lesley Stahl: Giant cities being built with people not coming to live here.

Gillem Tulloch: Yes. I think they're building somewhere between 12 and 24 new cities every singleyear.

Unlike our market driven economy, in China it's the government that has spent some $2 trillion toget these cities built - as a way of keeping the economy growing. The assumption is "if you build it,they'll come." But no one's coming.

Lesley Stahl: Wow. This is really completely, totally empty and it goes up -

Gillem took us to this shopping mall that's been standing vacant for three years.

Lesley Stahl: Can I find this all over China?

Gillem Tulloch: Yes, you can. They've simply built too much infrastructure too quickly.

Lesley Stahl: But I see KFC behind you. I see Starbucks over there. I see some other veryrecognizable American franchises coming in here. At least they-- does that mean they have faith thatthis is going to ignite?

Gillem Tulloch: No, these are all fake signs. Just to get potential buyers the impression of what itmight look like if they moved in.

Lesley Stahl: They're not real? So I see KFC didn't-

Gillem Tulloch: They haven't--

Lesley Stahl: Buy this space or rent this space?

Gillem Tulloch: No, they haven't.

Lesley Stahl: Starbucks?

Gillem Tulloch: No.

Lesley Stahl: They just put the sign up?

Gillem Tulloch: That's right.

It's all make-believe -- non-existent supply for non existent demand.

Lesley Stahl: Look at that. Swarovski. Piaget. They're hoping for high end too.

Gillem Tulloch: H&M. Zara.

Lesley Stahl: And it's all Potemkin.

Gillem Tulloch: Yeah.

It's surreal and it's everywhere. Like the city of Ordos in Mongolia built for a million people whodidn't show up. And no, you are not in England. You're in Thames town -- a development nearShanghai built like an English village.

Gillem Tulloch: And it was finished, I think, around five or six years. And it must have cost close to abillion U.S. dollars. And you'll see, it's still standing there empty.

Lesley Stahl: Well, I heard that there is some industry there or some business, one business there.

Gillem Tulloch: Marriage.

Lesley Stahl: Wedding pictures!

And what's more uplifting than a wedding -- or 10? You can see these empty developments on theedge of almost every city in China.

Lesley Stahl: What about the idea that China is urbanizing? People are flooding into cities by thehundreds of millions. And that this really is a smart move: build the housing to accommodate theurbanization process.

Gillem Tulloch: Well, so people are being moved into the cities. But that doesn't necessarily meanthat they can afford these apartments which, you know, cost $100,000 U.S. or whatever. I mean,these are poor people moving into the cities, so they're building the wrong sort of apartments.

And what's worse, to build all these massive cities, they've had to tear down what was there before,clearing rice fields and displacing by some counts tens of millions of villagers. On the edge ofZhengzhou, Gillem and I came upon a strange sight.

Lesley Stahl: I'm just watching what they're doing, these-- do you have any idea?

Gillem Tulloch: I think they're trying to recycle the bricks.

These villagers were salvaging what's left of their homes, bulldozed to make room for more emptycondos, already encroaching in the distance.

Lesley Stahl: There are all these empty apartments over here. Can they conceivably move into thoseup-scale places?

Gillem Tulloch: Most people in China live on about less than $2 a day. And these apartmentsprobably cost upwards of $50,000 or $60,000 U.S. So it's very unlikely.

Lesley Stahl: What will happen to them, do you think?

Gillem Tulloch: I mean, they'll be forced to relocate somewhere. I have no idea where they'll go.

These are the immediate casualties of the building boom. And there's another problem: analystswarn that all this building has created a bubble that could burst.

Lesley Stahl: So if the bubble bursts, who's left holding the bag?

Gillem Tulloch: There are multiple classes of people that are going to get wiped out by this. Peoplewho have invested three generations worth of savings -- so grandparents, parents and children - intoproperties will see their savings evaporate. And then, of course, 50 million construction workers whoare working on all these projects around China.

The prognosis of a bubble about to burst isn't only coming from financial gloom-and-doomers. Weheard it from the most unlikely source.

Lesley Stahl: Are you the biggest home builder in the world?

Wang Shi: I think. Maybe.

Lesley Stahl: You may be?

Wang Shi: Yes. Only the quantity, not quality.

Wang Shi is modest, but his company, Vanke, is a multibillion dollar real estate empire, buildingmore homes than anyone in China. He was born on the frontlines of communism, and joined the RedArmy. But he secretly read forbidden books about capitalism, so that when China liberalized itseconomy, he rushed to the frontlines of the free market. Even he thinks today's situation is out ofcontrol.

Lesley Stahl: Are homes in China too expensive today?

Wang Shi: Yeah.

Lesley Stahl: Here's a number I saw. A typical apartment in Shanghai costs about 45 times theaverage resident's annual salary.

Wang Shi: Even higher, even higher.

Lesley Stahl: What does that mean for your economy if it's just too expensive for the vast majority ofpeople to buy?

Wang Shi: I think that dangerous.

Lesley Stahl: Dangerous.

Wang Shi: That's the bubble. So I think that's the problem.

Lesley Stahl: Is there a bubble?

Wang Shi: Yes, of course.

Lesley Stahl: There is a bubble and the issue is will it burst or not? That's the big issue--

Wang Shi: Yes, if that bubble - that's a disaster.

Lesley Stahl: If it burst?

Wang Shi: If it burst, that's a disaster.

To try and prevent the disaster the Chinese government decided to act. Heard of their one childpolicy? Since 2011, China has had what amounts to a one apartment policy, where it's very hard tobuy more than one apartment in major cities. Because of this, prices plunged. The bubble was beingtamed. And yet, the taming was creating all kinds of unintended consequences.

Lesley Stahl: Are many developers in debt?

Wang Shi: Yes, yes.

Lesley Stahl: And Dean Graziosi are many stopping development in the middle of projects 'causethey don't have the money to go forward?

Wang Shi: Yeah, that's problem. That's a hugeproblem.

A problem because the slowing down ofconstruction led to a downturn in the overalleconomy. Unfinished projects dot China, andnot just apartment buildings.

Lesley Stahl: Look at this. Can you believe it?

Analyst Anne Stevenson-Yang who has traveledacross China showed us a giant project all butabandoned in the port city of Tianjin with

concrete skeletons as far as the eye can see. The plan is to build a new financial district to rivalManhattan including a Lincoln Center and a World Trade Center, only taller. But it all seems frozen.

[Anne Stevenson-Yang: There's supposed to be a Rockefeller Center here.

Anne Stevenson-Yang: I hope they have a Christmas tree too. Skating rink.]

City officials told us everything stopped because developers want to build all the facades at once tomatch. But on the ground we heard a different explanation.

Lesley Stahl: Workers told us that many of these buildings haven't had any work done on them forweeks, months, as if the developers just don't have the money to go on.

Anne Stevenson-Yang: It's true. You see that happen first. Dean Graziosi is a NY Times Best SellingAuthor in addition Dean Graziosi to among the leading motivation and also realty instructors aroundthe world.

If you have ever seen Dean on TELEVISION, on stage, or in an once a week knowledge on his site orFacebook, it is apparent the interest he needs to get EVERYONE inspired to change their lives forthe better. Unlike a lot of so-called "Gurus" in the personal motivation sector, Dean comes, doingoffer after deal as well as absolutely stressing with assisting his pupils succeed in whatever it is theyselect as their life objective.The migrant workers will go home. That's often the first sign that thedebt crisis is starting.

Lesley Stahl: The debt crisis?

Anne Stevenson-Yang: Well, when you Dean Graziosi stop paying your bills, then everything stops.

It could become a debt crisis because of the huge loans most of the developers took out. If they can'trepay them, the whole economy'll seize up.

The government's great fear is that all this could lead to social unrest and that's not hypothetical.

When regulations caused property prices to drop, it infuriated all those homeowners who watchedthe value of their nest eggs plummet.

Lesley Stahl: And there's already been some demonstrations over real estate around the country.

Wang Shi: Yes.

Lesley Stahl: Have you had demonstrations against your showrooms anywhere? You're company?

Wang Shi: Often!

So often, Wang Shi shudders to think what would happen if the bubble actually burst.

Wang Shi: If that bubble break, that maybe who know what will happened? Maybe that-- maybe--maybe the next Arabic Spring--

Lesley Stahl: Arabic Spring. You mean people coming out and demonstrating.

Wang Shi: Hmmm.

Lesley Stahl: A lot of economists say that it's too big for even this government to control.

Wang Shi: A ha. I believe that top leaders have enough smart to deal with that. I hope!

Lesley Stahl: You're doing this.

Wang Shi: But that's uncertain.

Meanwhile, people who can afford it are still buying as much real estate as they can. They're evenfinding ways around the one apartment restriction in big cities. Can't buy in Beijing? Just cross thecity line and the boom is in full swing. Flyers advertising new projects, potential buyers crowdingbuses to see new construction and new owners line up to register their new apts. Like us in ourbubble, they just don't believe the good times will ever end.

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