Welcome to the Kleber & Associates blog! Here’s the latest on China’s Growing Housing Bubble

China’s property market has been a hot topic in the news recently. Yes, property prices have been continuing to rise despite government intervention; but, are they close to overheating? Or instead does China’s housing represent a bubble that the government is actively and successfully deflating? I’m wondering what will come next — and most importantly, if there should be a pop, will it impact the global economy and the U.S. recovery?

Gillem Tulloch, a Hong Kong based financial analyst, was among the first to bring attention to this pending housing inflation in China. In his essay, “China’s Real Estate Bubble,” he points out a potential big problem: China may well be creating “ghost towns” with completely empty towers, neighborhoods and shopping malls. Although they’re adequately financed, hardly anyone lives there. Many in the middle class have been buying homes with fresh money to invest, as pure speculation. 15 years ago, the Chinese government revised its restrictive policy, allowing people to buy their own homes. And as the saying goes, be careful what you ask for. “[Real Estate] is the main driver of growth and has been for the last few years. Some estimates have it as high as 20 or 30 percent of the whole economy,” says Tulloch. He explains that citizens aren’t the only ones to blame. China’s government in fact, has spent some $2 trillion to get cities built as a stimulative means to grow the economy. And have we heard that scenario before? Those like Tulloch, who are close to the industry, agree that it’s devastating to ponder about what could happen if a China housing bubble were to explode.

Despite the negativity about housing’s elasticity and its potential fate, some official reports readily defend the evidence of rapid growth mode, recognizing that the momentum is well within sustainability standards. In “China’s Non-Bubble Housing Bubble,” Kenneth Rapooza, contributor for Forbes, argues that China’s housing escalation is a “non-bubble” and that the government there has done a admirable job of controlling prices. Those prices, he claims — while on the rise — are not out of control. Instead according to Rapooza,  Chinese restrictions have been set forth that require 20 to 30% down payments to buy a home, which provide far less debt for both builders and buyers (and less potential stress on banks).

Yet while the reported ghost cities continue to spread through China, builders are doing what they do best: continuing to build. Most remain confident rather than cautious and evoke instead, a national pride amid the robust economic backdrop. In fact, the larger homebuilders there seem to be immune to the reports of doom and gloom; rather, they are seizing the opportunity in the landscape to overtake smaller companies. Their deep pockets allow for them to better weather the vacancies than may their less-capitalized competitors.

The collective crystal ball here is of course, far from transparent. What will happen if we are witnessing a true bubble and it were to burst? Would the impending outcome be a disaster for the local economy, plunging home values and sparking social unrest? Would the result create serious implications for the international commodities markets from the world’s second largest economy, delivering a domino effect that could felt across the globe? China’s housing bubble isn’t likely to burst without an escalating warning; however, signs are clearly growing. Will the government be able to curb the housing enthusiasm? Some say absolutely, and others say no.

Which side are you on?