China Real Estate Bubble a Worry for the World

China Real Estate Bubble a Worry for the World

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The Chinese housing market is seeing phenomenal growth in prices. Despite the global slowdown, property prices in Beijing and Shanghai have quadrupled in recent years, threatening to push house prices beyond the reach of Chinese families.

Because of this, and the fact that most people expect the phenomenal growth to continue, thousands of Chinese families are stretching themselves very thin to buy a house now, for fear that prices will spiral out of their reach in the coming months and years.

Despite a forecasted GDP growth of 8.3% this year to support growth in the housing market, the rapid rise in house prices and in speculation are still creating a massive bubble according to analysts.

According to Pimco, bank lending in China rose by 30% last year, thanks in part to lax lending standards. Signs of investment overcapacity are also beginning to show in China’s industrial sectors. According to one estimate, on an average day in 2009, more than 1,000 new industrial projects were initiated. This is one dragon whose roar is definitely being heard.

We have all seen the damage an Asian real estate bubble’s pop can cause: in the 80’s Japan’s property market was absolutely red-hot. When the bubble popped it cause a shock-wave that devastated the economy, the stock market and the balance sheets of banks. It was over a decade before the Japanese economy got back on its feet. Given the interlinking of global economies today, a Chinese bubble pop could bring a second wave of international economic misery on a par or possibly even worse than the first.

Thankfully the Chinese government is taking steps to cool down the market, for example it increased required bank reserves by half a percentage point earlier this week in an effort to slow lending. Other measures that have been proposed include: imposing taxes on certain property transactions and ordering more scrutiny of loans. Any Chinese family buying a second home must now make a down payment of at least 40%.

Whether or not these steps will be enough to prevent the bubble reaching dangerous levels is anybody’s guess. One thing is certain, we will all find out if they aren’t.

Photo credits: Poeloq via Flickr