It really doesn’t need an explanation as to how the U.S. real estate bubble burst, however there is another country with a surging economy who could end up with a housing crash that could shock the global economy, China. China’s real estate market is slightly different than the U.S. because the types of housing that is exploding in China are condos rather than single-family homes. Throughout the years, demand has exceeded supply which has led to skyrocketing prices in anticipation that the condos will keep selling. However just like with the U.S. housing market in 2007, prices are starting to slide, builders are stuck with empty condos and homeowners who bought real estate beyond their means with the hope that prices keep going up are left in a precarious situation. Even though the U.S. housing crash led to the global Great Recession, it is unlikely that a Chinese real estate crash will sink the world into another recession, it will however make the recovery much harder.
The Chinese real estate market is relatively young since the Chinese people have only been able to own their homes since the late 1990’s, before all property was owned by the state. Often times real estate has been the only investment the Chinese people have been able to make because they had no other vehicle to put their investments in. Another cause of the bubble was a result of the Chinese government loosening restrictions on borrowing to keep the economy growing, also known as an expansionary policy, the goal was to keep the economy growing at 10% during the Great Recession. This has prompted housing prices to swell at rate of 50% over the span of three years ending in 2010. As said before the housing that was being bought were not single family homes but rather apartments and condos and investors all over have been looking to cash in (just like during the U.S. housing bubble).
The Chinese government did notice the run-up in prices by speculators and attempted to reign them in by higher down-payments, tough qualifications for mortgages, residency requirements and limits on investment purchases. These were similar reactions American banks had after the U.S. housing market burst. Eventually the developers did cave in and started liquidating inventories and lowering prices, understandably the recent home-buyers were not too happy with having prices drop on homes that they recently bought. As a result sales have dropped 20% during the first quarter and prices in some areas have dropped as much as 40% during the first quarter as well!
The question now isn’t whether or not the Chinese real estate bubble will burst, the question is how will it affect the global economy, after all the U.S. housing crash tanked the global economy. The Chinese people are not going to be affected as much as American homeowners were during the U.S. crash because the Chinese often require home-buyers to put up at least 20% of the mortgage. The developers on the other hand are in trouble, especially the ones that are over-leveraged, some have already declared bankruptcy. Other sectors of the economy that will be hurt are the banks who had loans collateralized with real estate and construction supplies manufactures (some even in the U.S.) are likely to get hurt too. However the banks aren’t as likely to get hurt by the Chinese housing crash than the U.S. crash because of the lessening dependence on CDO’s.