Ramifications of Chinese Property Bubble Collapse

Ramifications of Chinese Property Bubble Collapse

Just as the United States housing market appears to be recovering, China now appears to be teetering on the verge of a property bubble collapse. Sales in many cities have been slumping in recent months, and even government efforts to stimulate buying don’t appear to be raising consumer appetites for more property.

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The total value of property values sold during the first quarter of this year has declined by nearly 10 percent since last year. Meanwhile, construction has declined by nearly 25 percent as developers are holding off on building new properties. Many fear, however, that the worst has yet to come and that property markets could be in for an even bigger decline.

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Oversupply leading to property bubble

It appears that China is suffering from over supply with the number of available properties far outstripping the demand for them. Over the last several years real estate developers have invested heavily in residential real estate. With China’s economy rapidly growing, the country’s middle class has been rapidly expanding.

This, in turn, has increased demand for modern residential housing. As demand rose, prices began to skyrocket and many Chinese property markets quickly became among the most expensive in the world. Rising prices, however, have curtailed demand and many buyers are now refusing to open their wallets to purchase new properties.

By most accounts, there appears to be a major property bubble in China. Many real estate developments sit empty as there are no buyers willing to pick up the units. It appears that real estate developers overestimated how quickly China’s middle class would emerge and how much money these consumers would be able to afford to spend.

Now many real estate developers are trying to unload properties at low rates, which in turn will only send prices downwards and contribute to the deflating bubble.

Property bubble: What collapse would mean for regional economy

With the United States and Europe still struggling with slow growth, China has been an engine of momentum, especially for Asia and emerging markets. If China were to suffer from a property bubble pop, the entire economy could be at risk of a dramatic slowdown.

If the property bubble were to pop, a lot of companies would lose money. So to would a lot of households, which in turn would constrain consumer spending. The Chinese government has been laboring to turn China’s economy towards domestic consumption in recent years, so any restriction in consumer spending would be a major setback.

Worse yet, government efforts have so far failed to resolve the situation. This is important as investors and analysts have long had confidence in the Chinese government’s ability to confront issues, no matter how serious they might be. If the Chinese government’s efforts continue to fail, investors could lose faith.

This could send Asia into a contraction, something not experienced by Asian populations in a long time. With tensions already high across the region, there is no telling what effects such a contraction could have on both the economy and social stability in the region.

Europe and United States more insulated but at risk

Most trade flows from Asia are flowing into the United States and Europe, not out. This means that said economies will be more insulated from any decline. During the 1997 Asian financial crisis, neither Europe nor the United States suffered much from the contraction. Problem is, neither economies are as strong as they once were.

While any slow down in Asia will disproportionately hit its regional allies harder than Western economies, the fall out will still hit home. Many Western investors whom have been pouring money into Asia could also take a major hit. This could roil financial markets which in turn will have an impact on the rest of the economy.

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