Chinese Real Estate Bubble Near Bursting Point?

POP!

Uh-oh, this could be bad.  I mentioned a few months back that there is a property bubble in China that exists on a scale that dwarfs the housing bubble we experienced in this country.  This story has not been too widely disseminated in the mainstream media, possibly because we are in the midst of our own economic issues in the United States, or possibly because the media is somewhat myopic in its choice of coverage, or possibly because data coming out of the People’s Republic is sketchy at best.  In any case, a collapse of the Chinese residential property market would have potentially devastating effects on the global economy, the general availability of credit, and the U.S. economy in particular.

Today, Mish from Global Economic Trend Analysis has a lengthy post on the Chinese real estate bubble, which I absolutely recommend reading. Within the article, he shows evidence that Chinese property values have been propped up by a massive Ponzi scheme that government officials and real estate developers are complicit in.  According to the article, the typical Beijing home goes for 22 times the average income level, prices which are clearly not sustainable.

Adding to the evidence that the bubble is about to burst, demand for homes is down substantially this year, often one of the first signs of a bursting bubble.  The article goes on to cite sources that suggest Chinese banks could be left with hundreds of billions of dollars in bad mortgages if/when prices deflate.  Due to the way news out of China is controlled by the government, it may be some time before we get a clearer picture of what exactly is going on with the Chinese housing market.

One thing that seems evident is that the Chinese economy has largely been sustaining global growth for much of the past year or more.  China is also one of the largest holders of U.S. government debt.  We have seen what the European sovereign debt crisis is doing to worldwide markets.  A serious disruption to China’s economy will pose at least as great a threat to worldwide financial stability, and it is definitely something to be aware of moving forward.