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Deep, in the mountains of Austria, lies the small, but scenic town of Hallstatt.

But this isn't that, It's an exact replica, built 9,000 kilometers away, near Hong Kong.

Austria.

China.

It's home to European architecture, Chinese cuisine, and all the traffic of…

North Korea.

Because, during the day, it may be the wedding photo capital of the region,

But after the sun sets, its cottages become remarkably quiet.

China's lookalike towns, of places like Paris, Berlin, London, and Jackson Hole, Wyoming,

aren't alone.

In many places, across China, there are far more houses than there are people.

Long rows of apartments, even entire cities, sit completely, or mostly empty.

In total, approximately 50 million units, Or 22% of China's entire urban housing.

But this doesn't mean they aren't being bought.

Because, they are.

Like crazy.

Ten years ago, most people were, as you'd expect, buying homes for the first time.

Today, it looks like this.

Second homes are the majority, and people are buying almost as many third homes as first!

These aren't cheap, either.

In Los Angeles, the price per square foot is $633.

In Shenzhen, 805.

And, close your eyes, because you don't even wanna know the price in Hong Kong.

Now consider the difference in wages.

The average annual income in Shenzhen is around 7,500 US Dollars, compared to 60 thousand

in LA.

Something clearly doesn't add up.

People in China are buying homes like Americans buy… cars, But they're leaving them empty,

And it's not clear where the money is coming from, or why they're being built.

The usual explanation is that China's government is so desperate for economic growth that it

builds bridges to nowhere and houses to… look at.

But that's only one part of a much bigger story.

China's troubles begin with its political system.

The Central Government is the highest level of its only party.

Here, laws are written and the fate of the nation, decided.

Beijing is THE ultimate authority.

It appoints everyone from secretaries to governors, and isn't afraid to move them around should

any one official gain too much influence.

BUT - it would also be a mistake to see China as one, singular power.

Because below the central government is a network of local divisions: 22 regional provinces,

4 municipalities, 4 autonomous regions, and 2 Special Administrative.

Under those are over 300 prefectures.

Followed by the less important counties, townships, and villages.

Now, just as Californians have different concerns than do Texans or Floridians,

China is a big country, and the interests of a coastal exporter like Shenzhen are very

different than those of, say, a more independent region like Inner Mongolia.

The same is true for different levels of government.

While Beijing writes the rules, cities apply and enforce them.

Often, very differently.

And there's one, awkward little detail: Cities receive just 40% of tax revenue, but

are responsible for 80% of their expenses.

So, naturally, they need another source of income.

And this is where things get interesting.

In China, rural land is collectively owned.

Everyone, and also no-one, owns it, which means it can't be the location of a new

luxury apartment.

But luckily for cities, they have the power to rezone land from rural to urban, which

can be developed.

In other words, they own a money printing machine.

Watch this: First, a city buys cheap, rural land, Which it then redefines as urban, And

finally, sells to developers at its now, much higher, price.

Like.

Magic.

Over, and over, and over, again.

Cities get much-needed cash, and developers build housing like it's nobody's business.

Now, unlike states in America, local governments here are generally forbidden from taking loans.

But, again, there's a loophole.

Cities can create a Local Government Financial Vehicle, which is a fancy way of saying, a

state-owned company.

And by “giving” it that new urban land, the “company” can do what the city legally

can't: borrow money.

Which, they can use to build roads, schools, and, on occasion, replica Austrian towns.

This is so effective that, in some years, land sales account for 40% of local government

revenue.

Plus, all this construction increases GDP, which just so happens to be the way officials

get promoted.

It's a perfect system.

At least, until it's not.

If, or, when, housing prices fall, so does city revenue.

And, all those loans probably won't magically disappear.

Beijing wants to avoid a housing crisis, but cities just want to survive, and governors,

get promoted, which puts the two at odds.

Eventually, cities start running out of land to sell, and have no choice but to build more.

Like this one, which spent 2 billion dollars blowing up the tops of mountains.

Those developers who purchase that land, by the way, are required to use it, which leads

to many, often quickly-constructed, low-quality, houses.

And that brings us to the second question: why are people buying them?

And doing it like their life depended on it?

Well, for one, because it kinda does.

Thanks to the famous One Child Policy, China now has the entire population of Canada more

men than women.

And that means fierce competition for marriage.

Men are expected to own at least one property before even being considered.

It's one of the most important elements of social status.

For many, real estate isn't just an opportunity, it's a downright social necessity.

Because of this, friends and family pool money together to help buy homes for their children.

And that's how, nearly everyone, in a country with the per capita GDP of the Dominican Republic,

can afford some of the most expensive homes on the planet.

The other big factor is that Chinese citizens Save.

Like.

Crazy.

When it comes to saving money, there's China, and then there's basically everyone else.

Where, Europeans put 4 percent of their disposable income in the piggy bank, Chinese drop nearly

40!

The problem is, where can they put it?.

China's domestic stock market is just too risky, And its banks are often seen as unpredictable.

Which makes real estate a Chinese investor's best friend.

It alone accounts for 70% of all household wealth.

It also doesn't hurt that property tax is a beautiful 0%.

When taxes are only paid upfront, why wouldn't you buy as soon as possible, and just sit

on it?

Put all this together, and you have a recipe for extreme house buying.

An amazing 90% of homes are owned by their residents.

Europe and the U.S., stand at 69 and 64%, respectively.

And while we're on the subject of crazy high numbers, Ninety-four percent of Chinese

millennials who don't already own, plan on buying in the next five years.

What else do 94% of people agree on?

Not even China can quench this thirst for real estate.

Despite laws against it, billions of dollars flow out of the country every year into foreign

property.

It's so common in places like Vancouver, that, earlier this year, it introduced a 20%

tax for foreigners.

The irony is that while cities like Beijing and Hong Kong have so little room, people

are forced to sleep underground, these 50 million homes can't find renters.

So, hey, if you live in California, I think I may have found an escape plan.

Anyway, not only are these homes bought without interiors, literally just concrete walls,

but they're also usually located outside city centers, where there aren't as many

jobs.

Now, the assumption in all of this, is that, eventually, people will come, And speculation

will become reality.

The Eastern side of Shanghai, for example, was once laughed at by Milton Friedman for

being totally empty.

Today, as a financial capital of the world, with a GDP of 400 billion, we can pretty safely

say it's proven the haters wrong.

China is in the process of migrating 300 million people from country to city, And, of course,

they'll need a place to live.

Inevitably, many of these cities will spring to life.

That doesn't mean everything is peachy.

A few things are decidedly not peachy.

First, remember that the vast majority of empty homes is expensive, commodity housing.

These are not the kinds of places you buy coming from a farm in the country.

And second, all these homes have an expiration date.

In China, a building can be owned, but the land beneath it can only ever be leased - from

the government, for 70 years.

After that, it's anyone's guess whether ownership will be renewed.

And if so, for how much.

But, the truth is, 70 years is pretty optimistic…

Think about it this way: If construction is good for GDP, why build once, when you can

build and re-build every few years?

It's kinda like the iPhone, if you'd like to upgrade every year, Apple will happily

sell you a new phone.

It's certainly not judging.

Except, in the case of China's housing, developers are incentivized to make short-term

bets, they know their homes will only last a few decades anyway, which means using lower

quality materials.

Meanwhile, cities continue taking loans and housing prices continue rising unsustainably.

Of course, Beijing knows all this.

It's aware of the bubble, the risks involved, and it knows more or less how to fix it - some

combination of slowing down lending, reining-in local governments, and introducing a property

tax, like Shanghai.

The problem is, real estate is so intertwined with its GDP, that any of these solutions

would seriously risk slowing down its economy.

In the coming decades, the world will watch as China does its best to carefully balance

its enormous challenges with its relentless desire to grow its economy and realize The

Chinese Dream.

As Beijing prepares for economic change by diversifying its revenue, You and I should

do the same.

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