Chinese Condo Bubble Trouble

First, an expose on CBS 60 Minutes on Sunday, March 3, 2013, and now the Globe and the Post are onto the China real estate bubble story. http://on.wsj.com/XWufEm  http://natpo.st/13GWNsO

The media has been obsessed with the Toronto/Vancouver housing bubble for several years now, and are almost joyful that there has been a slowdown in both of these cities to justify their doom and gloom prognosis.

 While everyone worries about the Canadian housing bubble, the risks of a massive meltdown in China have gone by virtually unnoticed.  If anyone has seen the 60 Minutes exposé on the Chinese residential and commercial explosion last Sunday, they now know what a housing bubble really is.  What we have here in Canada is a housing recession compared to what is going on in China.  And when it blows, as it surely will, the economic impact of same will reverberate around the world, not least of all here in Canada.

 Firstly, building construction represents 25-30% of the entire Chinese economy.  That means any uptick or downturn in construction will have major ripple effects on the Chinese economy and all the world economies that rely upon China for trade like Canada, with it being a huge exporter of raw materials.

 The CBS 60 Minutes show first showcases a Chinese couple who both came from humble beginnings 20 years ago to build a commercial building empire worth billions.  So much for communism.  Capitalism encouraged by a socialist government?  What is going on?  And much of the construction funded by government money or banking loans to massive developers that no self respecting Canadian bank would make.

 Scores and scores of buildings of space age design in newly created cities, virtually empty-commercial and residential alike.  Fake American chain names like Apple and H & M plastered throughout totally vacant retail malls to entice unsuspecting tenants to lease up space.  Towns and villages and thousands of people displaced to make way for new high rise cities that are virtually empty.  The pictures of these massive high-rise communities virtually empty were reminiscent of futuristic movies like Hunger Games.  Sadly, they are tragedies, not a make believe movie.

The thirst for real estate and greed for profit in a country formerly the model of socialism is shocking.  People were buying 5, 10 condominiums with cheap mortgages at prices equivalent to 45 times the average annual Chinese worker’s salary, and left empty.  The prospect of never ending price increases has fueled a housing boom in major Chinese cities unparalleled in Western history.

 Despite efforts to cool housing and reduce prices to make them affordable, the Toronto of China, Shanghai, have seen price increases of 41% year to year in the first 2 months of 2013. so the Chinese government took a page out of Flaherty's housing crackdown book, and has been imposing new stringent real estate and borrowing rules to cool an overheated market.

Recent efforts to limit mortgages, and one condo per family in major cities, as well as the imposition of a 20% capital gains tax 2 weeks ago on home sales have put a major dent in Chinese housing. Shares of Chinese builders plummeted last week.  Shares in Shanghai Stock Exchange fell 9.3% after the capital gain tax was announced.  Has Jim Flaherty been whispering in the ears of Chinese politicians?

 If and when the Chinese housing and construction bubble does burst, as it surely will, totalitarian government or not, watch out.  There will be some serious fallout that none will escape, even here in Canada.