I’ve been warning that the greatest threat to the global economy is the bursting of China’s real estate bubble. It’s the largest and most extreme in the world. Prices for Shanghai real estate have gone up 650% since 2000 and 86% since the last peak in 2007.
Here’s my question… what’s driving this bubble?
The answer lies in the movement of 220 million people from rural to urban areas over the last 12 years — the greatest and fastest urbanization rate in history.
And what do these new unskilled people do for a living? They build condos for no one.
China has massive ghost cities with little or no residents. It has 27% of its condos in urban areas that are standing there… vacant.
221 million people are unregistered citizens of these cities with no social benefits from education to health care.
The Chinese government is walking a tight rope…
They’re curbing their runaway shadow banking system and then encouraging bank lending.
But the recent surge in bank lending only caused a temporary bounce in housing prices, which is already failing again as the following chart shows.
Home prices in the first tier, which consists of the largest cities, has already seen the biggest decline yet — from more than 19% in late 2013 down to -4% recently — a swing of 23% points. That compares to the decline from slightly above 12.5% in late 2007 to -7% in early 2009, a swing of 19.5% points.
The second and third tier cities are now down 5%, even more than the first tier.
Out of 70 markets, 64 of them fell in January after 67 out of 70 fell in December. This is looking very serious.
The key thing to remember is that the Chinese have 75% of their net worth and savings in real estate versus 28% in the U.S. as the chart below shows.
These condos are not only overvalued but they’re often empty and not owned by the developers that couldn’t sell them. They’re bought by Chinese investors… especially the top 10% that control 60% of the income in the Chinese economy.
When the wealth of these investors and consumers implodes, so will the Chinese economy and the huge portion that comes from building real estate, infrastructure and factories for no one.
One thing to note is that the affluent Chinese are also the most aggressive buyers of high-end real estate in the leading English-speaking cities around the world now. The Russians and Middle-Eastern buyers are receding due to the crash in oil prices and the drop in the Russian ruble.
We’ve been warning about this for years… the crash of the Chinese bubble will be the biggest factor in the next great global crash and the central banks in the U.S. and Europe will be able to do little about it. China’s real estate implosion will set off a global crash in all of the cities that have thus far managed to defy the 2008 crash.
As for cities like New York, L.A., London, Vancouver, Singapore, Sydney and many more? Don’t think they won’t fall.
P.S. Follow me on Twitter @harrydentjr.