Just yesterday I happened to watch the first episode of BBC's Wild China. The section on caves goes into this, and among other things shows a small village school built inside a giant cave.
Two things are totally different... The cave mentioned in the article only exists in northern China and is man made. While the cave in the picture you post is in souther China and is natural cave.
While we're handing out recommendations, check out of the BBC documentary Human Planet. The name might suggest otherwise, but it breaks out of the increasingly stale Attenborough mold. It's as much anthropology as nature documentary, even more so than Wild China.
Common as well in first-millenium middle-east, as in Petra[0] or Mada'in Saleh[1], and there were quite a few cliff-dwelling people in precolumbian north-america, the most well known probably being the Anasazi which had well-known under-outcropping dwellings (e.g. Cliff Palace) but also actual cave dwellings like Tsankwawi[2] or very-close-to-cave dwellings like the House of Many Windows[3].
In Granada, Spain, there are a bunch of such "cave dwellings" in the hill above the Alhambra Palace, from the inside looking quite similar to the photo in this story, small rooms with lime whitewash on the walls. I was graciously invited for an evening in one of those places, and while it was a bit cramped, and maybe a bit roughly furnished (you must use an out-house in most cases, if you were wondering, and the plumbing and electricity can be a challenge), it was agreeable and the temperature stays in a comfortable range in temperate climates.
Here's an interesting and brief travel documentary featuring some info on the cave dwellings in the second half:
And though I hate to link to the Daily Fail, they do have a nice little overview guide of Granada with a good picture of the cave dwellings from the outside and a bit of historical info here:
The most interesting aspect is how quickly China is changing. Within a single generation, families have moved out of "holes in the mud" to village houses. Satellite TV and mobile phone coverage is also apparently available in Zhangjiashu village (and other similar remote villages).
Cave dwellings or yaodong still exist for some poorer families. “I used to live in a cave dwelling when I first got married,” said Ma Yan’s mother, Bai Juhua. “Very few people live in one of those anymore. Recently, a few of them collapsed because of the rain. Thank goodness nobody was hurt.”
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They may not have drinking water, no proper toilet, no food…but they will definitely have mobile phones and satellite dishes for their TV.
I would wonder a lot about air quality – radon accumulation or other local equivalents. Might not be worse than fumes and wear traces from other modern building materials, though.
Actually, the cave you saw is very near my hometown, it is not that bad. The ventilation in it is good, and currently we have modern household electrical appliances as well.
Lots of local people adopted all things that exists in normal buildings, such as TV cable, Internet access, cars parked their own in the yard, etc.
Here's a picture: http://static.bbc.co.uk/programmeimages/640x360/clip/p009j8q...