No Deed… No Sex

When you can’t find a wife because you don’t own property, you know you have a problem.

Welcome to China, home of the biggest real estate bubble in modern history.

Home prices in Shenzhen — China’s largest coastal industrial city — are 35 times income!

Can you imagine making $50,000 a year, yet having to pay $1.75 million for a condo?

I wouldn’t be happy about that at all.

And the rest of China is not much better…

Home prices in Beijing are 30 times income. In Shanghai and Guangzhou they’re 28 times income.

That’s insane.

These numbers exceed the house-price ratio of all the major cities in the world. For example, in Hong Kong, home prices are only at 17 times income. In Mumbai, they’re at 19 times income. In London, now the most expensive city in the developed world, they’re at 15 times income.

Even in Vancouver and Sydney they’re only at 11 and nine times income.

Without a doubt, China’s real estate bubble is unsustainable, but it gets worse…

Thanks to overbuilding, the bubble continues to inflate, despite massive vacancies in cities across the country. According to electricity-use surveys, average vacancies run at 27%.

Ordos, the infamous ghost town, is China’s poster child for the trouble brewing in paradise. The city was constructed in the central part of the country to accommodate one million people, yet it has only 70,000 residents.

To put that in perspective, I’m talking about a city approximately the size of San Jose that is 93% vacant!

And Ordos isn’t the only one. Tianduncheng (meant to look like Paris, complete with a replica of the Eiffel Tower) stands totally empty and Chengdu’s New Century Global Center (the largest mall and building complex in the world) is also almost completely vacant.

In fact, since 2001, China has been building houses at a much higher rate than households have been formed.

At the top of the last bubble (2005 to 2008), China was building five million homes a year, even though average annual household formation was just 2.6 million. But instead of scaling back when everything crashed, the Chinese went in the complete opposite direction.

In 2011, there were 19 million housing starts, but only 5.8 million new households. That means nearly 70% of the new homes constructed that year alone were completely unnecessary!

China’s real estate market is on the verge of utter ruin… and this is a problem for all of us. When — not if, but when — the Middle Kingdom’s property bubble bursts, it will send a shockwave around the world.

First to suffer will be its citizens.

That’s because Chinese love real estate. Like art, it’s their investment of choice. In the second quarter of 2012, 53% of home purchases were for investment.

The Chinese have the highest level of home ownership in the world. Rural people have 92.6% ownership, whereas urban people have 85.4%. It might seem odd that urban citizens have a lower home ownership rate, but with the cost of real estate in the cities, it’s not surprising.

Property investment is so entrenched in China’s culture that it directly impacts a man’s chances of having sex.

Chinese women must marry up… in all regards. Their spouse must be taller, wealthier, and more highly educated. He must also own a condo or some kind of real estate.

No deed… no sex.

The second to suffer will be everyone else… particularly the Pacific Rim economies of South Korea, Japan, Singapore, Australia, and New Zealand. And of course, the U.S. economy and Europe.

China’s bubble burst will be the driving force behind the next Great Depression, thanks to its close connection to the world of commodities. The country has pursued its emerging-country strategy for twice as long and twice as intensely as its failed counterparts, building more than twice as big a bubble. This leaves China caught in a vicious cycle.

With falling commodity prices hurting the exports and best jobs of resource-exporting emerging markets, they’ll reduce their demand for goods from China. China is then forced to reduce commodity purchases from these emerging markets, putting additional downward pressure on commodity prices, creating the vicious cycle.

And here in the U.S. we’ll feel the impact in rising interest rates. As the crisis unfolds, China and the emerging markets will be forced to reduce their foreign currency reserves. They’ll buy less U.S. Treasury bonds, and that will help drive up interest rates in addition to our new tapering policies.

Rising interest rates may sound great for those with sizable sums in their savings accounts, but it will be painful for the rest of us.

Higher interest rates make borrowing more expensive, and if the economy is struggling to recover with current rates at near-zero, it’s not difficult to imagine the negative impact when rates start to climb.

We’ll see reduced business and consumer spending, more layoffs, another housing market crash of our very own, and increased overall economic malaise.

And then what was that puff of smoke? You got it… the fragile U.S. economic recovery.

My advice: Prepare now for the inevitable. You can start by joining Boom & Bust, where Adam ensures our investment portfolio is ready for what we see ahead.

Harry

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Categories: Foreign Markets

About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.