China’s property bubble

Where have we seen this? Lax lending standards, get-rich-quick house selling, cheap credit, prices doubling within a few years and a firm belief that the good times will never end. The “experts” are confirming that it will last for years and are citing pent up demand for housing, which sounds reasonable enough. Sloppy lending on a large scale tends not to work out very well though, so that may complicate the “everything is fine” theory. Whether the export market will continue to sustain the high numbers is also in question and that too has led to the delicate balance that is working, for now.

For investors, many of the usual bubble warning signs are flashing. Fueled by low interest rates, prices in Shanghai and Beijing doubled in less than four years, then doubled again. Most Chinese home buyers expect that today’s high prices will climb even higher tomorrow, so they are stretching to pay prices at the edge of their means or beyond. Brokers say it is common for buyers to falsely inflate income statements for bank loans.

Some economists and bankers fear that they have read this script before. In Japan at the end of the 1980s and in the United States in 2008, residential real estate bubbles ended in big crashes, battered banks and slow recoveries. With China acting as a key engine of global growth, a bursting of the Chinese real estate bubble could be a pop heard round the world.

An American in Paris, France. BA in History & Political Science from Ohio State. Provided consulting services to US software startups, launching new business overseas that have both IPO’d and sold to well-known global software companies. Currently launching a new cloud-based startup. Full bio here.

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