Chinese real estate bubble pops just like Dubai three years ago

Posted on 15 December 2011 with 1 comment from readers

The spectacular real estate boom is over in China with new home prices in Beijing crashing by 35 per cent last month and the growth of M2 money supply dropping to its lowest in a decade. All real estate booms end this way.

Dubai was no different three years ago when an off-plan-fuelled frenzy crashed to earth leaving local property prices down 60 per cent. For the past two years hedge fund billionaire Jim Chanos has been warning that Chinese property was ‘Dubai x1000′ and has been shorting the market.

Stock market impact

The Chinese stock markets have indeed headed south. The Shanghai index is 30 per cent down from May and 60 per cent off its 2008 peak. If Dubai is the precedent then stocks will be heading for an 85 per cent fall from top to bottom.

Investors piling into Chinese stocks are getting a bargain but bigger bargains are just around the corner. It was the same in Dubai when investors returned to the stock market after the crash of early 2006.

With hindsight we can see that both the Chinese and Dubai stock markets accurately foretold the disaster that was coming. Dubai is a much smaller real estate market than China but the oversupply issue is the same.

The commercial city of the United Arab Emirates has quietly gotten on with completing many skyscrapers that are now close to completion. Just look at the Dubai Marina super towers pictured above, only the abandoned 100-storey TAV tower is left as a monument to the crash and the stalled Pentominium tower, supposed to be the tallest of them all.

How the Chinese economy will handle a property crash is not at all clear. Its legendary foreign exchange reserves are all tied up in US treasuries whose value would crash too if China pulled that money out.

Mortgage finance may only be 19 per cent of GDP in China but then it was less than that in Dubai when the market crashed three years ago. Indeed, the Chinese real estate market has much in common with the ponzi scheme financing techniques of off-plan sales that crippled Dubai.

Fire-sales

There is a fire-sale of property underway in the Chinese coastal cities with developers slashing 25 per cent of prices in a desperate attempt to find buyers, reports The Daily Telegraph today. People who bought at higher prices the month before want their money back.

China managed to ride-out the 2008-9 global financial crisis by a stimulus package equivalent to half of GDP. That excess liquidity fuelled up the property bubble that is now bursting.

For those of us who remember the collapse of the Dubai real estate boom this is clearly a major event and when the world’s third largest economy is in trouble, so are we all.