China's Real Estate Bubble May Have Just Popped
Financing the Middle Kingdom's recent building boom has been expensive: Estimates put local government debt alone at between $800 billion and $2 trillion, or around 13 to 36 percent of GDP. If the real estate bubble pops, financial and social crises will follow.
Condos under construction in Guangzhou. (Photo: Slices of Light / flickr)
For years analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred -- that is, until now. In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third. Crowds of owners who had recently bought apartments at full price converged on sales offices throughout the city, demanding refunds. Some angry investors went on a rampage, breaking windows and smashing showrooms.
Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months' worth of unsold inventory in Beijing and 21 months' worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that "the biggest bubble of the century," as it was called earlier this year, has just popped, with serious consequences not only for one of the world's most promising economies -- but internationally as well.
What makes the future look particularly bleak is the lack of escape routes. If Chinese investors panic and rush for the exits, they will discover that in a market awash with developer discounts, buyers are very hard to find. The next three months will be a watershed moment for a Chinese investor class that has been flush with cash for years but lacking a place to put it. Instead of developing a more balanced, consumer-based economy, an entire regime of Beijing technocrats -- drunk on investment-led growth -- let the real estate market run red hot for too long and, when forced to act, lacked the credibility to cool the sector down. That failure threatens to undermine the country's continued economic rise...