Should We Worry About A Coming Chinese Real Estate Bubble?

The government of China might be at this moment covering up a vast real estate bubble the likes of which we have never seen. After many years of rising housing prices, China’s property market is just starting to slow down. New home prices are now heading downward in some of the larger Chinese cities. Real estate has been the bedrock of China’s fantastic record of growth over the past twenty years, and the condition this market is a critical aspect that steers the continuation of China’s industrial construction and materials sectors. Culturally, real estate has been a favorite investment of Chinese people looking for a better return than the local bank. Also, many local provinces simply depend upon on escalating prices for land finance their ongoing infrastructure investments. The question is, should be begin to worry about all of this?The growing divide between China’s wealthy and its poor has placed many Chinese in the position of living in inadequate housing, and unlike the American real estate bubble, the Chinese property bubble wasn’t incubated in a test tube of easy credit and low down payments, which causes industry analysts to believe that if the Chinese property bubble pops it won’t come undone in the same way as the U.S. property bubble. What this means that when and if this happens we don’t know what to expect.A full 15% of China’s Gross Domestic Product is directly tied to real estate development and construction, and the Chinese government has an obsession with the building and development of massive infrastructure projects. Its efforts to slake its thirst for more real property has put upward pressure on the demand for raw materials and the things you need to build large projects. Any decline in real estate and apartment prices could harm the otherwise powerful Chinese construction and investment industries. Persistent slowdowns could put a damper on consumer spending, and that can create slack in the demand for imports which is what is currently propping up the economies of the developed nations. If that economic backstop is taken away from us there is no way to gauge the depth of the present global recession can reach.China is a “housing-led economy,” states UBS economist Jonathan Anderson, who estimated that real estate development by itself accounts for more than thirteen percent of the nation’s GDP in the year 2010. That is twice what is was in the 1990’s, but what are the ramifications for these western economies if the Chinese real estate bubble were to suddenly burst?The red-hot demand for Chinese property has fueled the demand for raw materials that come from Latin American and African nations that have adapted by working overtime to satisfy Chinese demand for these goods and materials.Many western corporations including retail organizations and restaurant companies have built their business models on provisioning the Chinese demand. If the Chinese demand for all these raw materials, products and services where to suddenly slow down — which is exactly what would happen if there is a significant decline in the demand for Chinese real estate, then the consequences for all of us could be quite dire.