China has at least 65 million empty homes - enough to house the population of France. It offers a glimpse into the country's massive housing-market problem.

• One-fifth of the homes in China - at least 65 million units - are empty.
• That amount of empty real estate is enough to house the population of France.
• The ghost cities are a testament to China's reliance on real estate as a driver of economic growth.

If you drive an hour or two outside Shanghai or Beijing, you'll find something odd. The cities are still tall, and they're still modern. They're also, generally, in good condition. But unlike their bustling, Tier 1-city counterparts, they're basically empty.

These are China's ghost cities.

Their existence has been well-documented. In one prominent example, CBS' "60 Minutes" ran a 2013 segment on China's ghost towns that opened with the correspondent Lesley Stahl on a major road at rush hour with barely a car in sight.

But as China's real-estate market has risen to the forefront of the global conversation with Evergrande's $300 billion debt looming large, so, too, have ghost cities become a renewed source of interest. While they're a testament to China's reliance on real estate as a driver of economic growth and in its belief in the sector as a safe investment, their exact quantity is hard to define.

Li Gan is a professor of economics at Texas A&M University and the director of the Survey and Research Center for China Household Finance at Chengdu's Southwestern University of Finance and Economics. He's also considered one of the top experts on China's housing market. When I asked him how many ghost towns there were in China, he didn't have an answer.

"I don't know if there's any definition of 'ghost town,'" he said. "So I don't know if there's any number."

What are China's ghost towns?

The best known of China's ghost cities may be Ordos New Town, also known as Kangbashi, in the region of Inner Mongolia.

The city was intended in the early 2000s to eventually house a million people, a number that was later scaled back to 300,000. But as of 2016, a mere 100,000 people lived in it. Kangbashi eventually managed to lure residents after China moved some of its top schools into the city, Nikkei reported earlier this year.

In 2015, the photographer Kai Caemmerer traveled to China to explore ghost cities. His photos show endless rows of high-rises with barely any indication of human life. They're photos, in fact, that might remind people of what locked-down cities around the world looked like during the coronavirus pandemic.

These unoccupied units constitute a significant portion of China's enormous housing market, which is twice the size of the US residential market and hit $52 trillion in value in 2019. Data from the most recently published China Household Finance Survey, which Gan runs, shows that 21% of homes - some 65 million - were vacant as of 2017, The Wall Street Journal reported.

That many empty units could house the population of France.

But unlike parts of the US and Japan, where homes in various states of abandonment and decay have prompted cities and regions to be called ghost towns, China's are different. They're not abandoned; they're just unoccupied.

As Gan put it, these ghost cities are "a unique China phenomenon."

How did China end up with all this empty real estate?

The first thing to understand about China's ghost cities is that they are not cities in states of disrepair. Instead, they are full of new builds that were bought as investments. They're also a symptom of mismatched supply and demand.

"These homes being empty means they are sold out to investors and buyers, but not occupied by either the owners or renter," Xin Sun, a senior lecturer in Chinese and East Asian business at King's College London, told Insider.

On the supply side, Sun said, the government gets big sales revenue from leasing out land to developers. "This gives the government very strong incentive to encourage development instead of limiting it," he said.

Every year, China starts building 15 million new homes - five times as many as the US and Europe combined, The Economist reported in January.

In addition to the government promoting development and driving supply up, there's the matter of China's urbanization rate. Data from the World Bank indicates that 61% of China's population lived in cities as of last year, up from 35.8% just two decades earlier.

Gan said there were flaws in China's urbanization-rate metrics, however, one of which is tied to reclassified areas. When rural areas are reclassified as urban, the people in those areas already have houses. So while they never moved, and won't need a new place to live, they still contribute to the urbanization rate, he said.

"Part of the problem is that China overestimated its urbanization rate - how many people would want to move from rural to urban areas," Gan said.

A culture of real-estate investment

On the demand side, the general upward trend of house prices has spawned huge demand for second and third properties, Sun said.

"Within two decades, house prices have grown multiple times in many places, including major cities," Sun said. "Most people in China haven't experienced a substantial real-estate bubble burst like what the US experienced in 2008 or Japan in the 1990s."

"This leads to a strong popular belief that real estate is the best way to preserve and generate wealth," Sun said. "And this stimulates the demand for buying additional properties."

Homeownership rates in China are high: More than 90% of households are homeowners, according to a January research paper on homeownership in China from the National Center for Biotechnology Information. More than 20% of homeowners in China own more than one home. The US, for comparison, has a 65% homeownership rate. Real-estate holdings also account for an outsize proportion of household wealth in China: 70% of household assets - far higher than what you'd find in Western economies - are held in real estate.

Demand for units, however - and this is where the mismatch comes into play - has been affected by a series of factors, said Bernard Aw, an economist overseeing Asia Pacific for Coface. Among these factors is the increasing unaffordability of homes, an aging population, and slowing population growth. Aw pointed to China's 2020 census, which recorded the slowest population growth since the 1970s.

"They built an oversupply, and then they sold it," Gan said. "And that's why you see the vacancies."

While the Evergrande crisis looms, China has ways of mitigating risk - including stopping home sales

Evergrande has more than 1,300 developments spread across 280 cities in China, which collectively house more than 12 million people, its website says.

But Evergrande also has $300 billion in debt, making it the most indebted company in the world; it has 1.6 million undelivered apartments hanging in the balance, and it keeps missing its bond payments.

Despite the size of Evergrande's scale and debt, the developer accounts for only a fraction of China's housing woes. "Evergrande is linked to the vacancy problem, but you cannot blame them for it," Gan said. "Their market share in China is still small."

"They're both part of a big problem," Gan added, pointing to Evergrande and the vacancy rate.

In 2017, Bloomberg described Beijing's nightmare scenario as one in which people rush to sell off their second properties if cracks in the market appear, thereby sending prices on a downward spiral. When I asked Gan whether this was the scenario now unfolding in China, he said it wasn't - but not because there aren't cracks in the market.

Instead, the government is making it so difficult to complete a sale that it's dissuading homeowners from selling, Gan said.

"China can stop a transaction. The government can change the number of years you have to own a home. Or if prices are too low, the government won't give you a certificate of sale," Gan said. "That is what's happening now."

"You won't see the price drop substantially, but you will see the transaction volume drop massively," he added. "They'll stop the sale. By doing that, they can prevent the look of a massive price drop. They can prevent the crash."

This very move - suppressing home sales - stands to hurt those who need to sell their homes to access cash, Gan said. "Real estate is a massive chunk of people's wealth," he said. "If they need that wealth for education, or health problems, or retirement, the liquidity sellers will suffer."

Gan stressed that the stopping of sales was not singularly, or even directly, linked to Evergrande's debt crisis: "This was happening before Evergrande became evident," he said.

Heightened contagion fears

In addition to liquidity sellers, households that own only one home are thought to face the greatest risk.

"People who own one home, because of high prices and low income, they have some risk," Gan said. "For many of them, their down payment is borrowed from friends, from relatives - not from banks."

It's a different story for well-off families with money invested in second and third properties, Sun said: "The risk of default for these families is relatively low unless a massive, unprecedented economic crisis leads to massive unemployment."

"But aside from that worst-case scenario, the risk of default is relatively low," Sun added.

On a broader scale, Evergrande poses a risk to the larger Chinese economy. Experts say Evergrande's debt problems could affect other property developers in China and might create a new wave of defaults. Just last week, the Chinese property developer Fantasia missed a $206 million repayment deadline. And a leaked letter from September 2020 shows the company's debts are tied to at least 128 banks, Reuters reported.

Another danger is that the Evergrande crisis stands to change China's perception of real estate as a safe investment, Sun said. That's a problem when the real-estate sector makes up 29% of the country's gross domestic product.

"The government is heavily reliant on households continuing to invest in real estate," Sun said. "So if the bubble bursts, it will inevitably compromise people's confidence in real estate and undermine their perception of real estate as the best way to preserve and generate wealth.

"That means a slowdown in real estate will cause a deterioration of economic growth and government finance."