China’s Property Bubble Echoes Subprime Crisis

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There will be no soft landing in China.

By Harry Dent, Senior Editor, Economy & Markets:

The menacing fury of economic triggers that began piling up after the Great Recession are only getting larger and we can’t do much but watch it unfold and stay alert.

I wrote about this in a letter late last year, but now here we are more than halfway through the year and it’s only getting worse. So much worse that the Chinese property bubble is now the catalyst that will reset markets – and will likely be one large event that cascades across the globe.

I’m convinced that what finally puts an end to central banker madness and the incessant stream of QE will be the Chinese real estate bubble.

Massive doesn’t even begin to describe the situation with China’s property market, but that’s somewhat expected with a population of 1.4 billion people.

And as the chart below shows, the bubble keeps on getting bigger!

Shanghai Real Estate Chart

China has stepped firmly into Japan’s slot as the economic force du jour of the Pacific Rim. In the 1980s, at the peak of its post-war boom, Japan dominated global markets and dove deeply into U.S. real estate.

At the peak of its stock and real estate bubble, in 1989, the Japanese were buying expensive, high-visibility properties hand-over-fist, from Pebble Beach to Rockefeller Center.

Of course, when the economic realities of Japan’s demographic shift became impossible to ignore and its economy slowed drastically, those properties sold to the highest bidder.

It was ugly and the end of a very impressive post-World War II boom. As bad as that was, the Chinese make the Japanese look prudent!

Chinese buyers are still bidding up the high end of the top coastal cities in English-speaking countries like prices will never go down and like they can’t get enough.

We’re talking all OVER the world, from Sydney, Melbourne, Brisbane, Auckland, Singapore, San Francisco, L.A., Vancouver, Toronto, New York, to London…

These are considered the “Teflon-proof” markets, but they’re not!

In fact, they’re some of the greatest bubbles that exist today. For the first quarter, residential prices in Shenzhen are up nearly 80% year-over-year, while those in Shanghai were up by roughly 65%, according to figures cited by Capital Economics analysts Mark Williams and Julian Evans-Pritchard in a recent note to clients.

Williams and Evans-Pritchard also point out that because of loosening lending standards introduced to keep the housing bubble going, China now looks alarmingly like the U.S. before its run-up to the subprime mortgage crisis.

Guess what happens when the bubble wealth in real estate that has built up in China finally collapses?

So does the capacity of the more affluent Chinese to buy real estate around the world. And these are the guys who have, by-and-large, been driving this global real estate bubble at the margin on the high end!

Bear in mind that Chinese real estate has been slowing and prices falling for over a year. That is precisely why China’s stock market bubbled up 160% in less than one year. When Chinese investors realized they could no longer make easy money in the real estate bubble, they turned to stocks. And after the dumb money piled in, the Shanghai Composite stock index fell 42% in just two and a half months!

What did the Chinese government do? What any government in denial would do – buy its own stock market with hundreds of billions of dollars! That’s what the U.S. government did when its stock market crashed in late 1929. And sure enough, China’s stocks are following the same pattern to a tee:


After that first crash, Chinese investors pulled back on their speculation in markets like New York and London. When you doubt your own economy, you feel less okay about speculating in others. It’ll only get worse when their stock market drops dramatically again.

But broader, look at the steady decline in residential investment in China since 2010. This is the leading indicator of China’s slowdown and the Communist Party of China continues underestimating its government-manipulated statistics. It’s gone from about 34% in 2010 down to near-zero at the start of the year.

China is going down. The China Beige Book (which is much more accurate) recently showed that, across the board, economic conditions are unraveling. There will be no soft landing in China. It’s only a matter of time. It will bring down the entire world’s unprecedented debt and real estate bubble.

Remember: the bigger the bubble, the bigger the burst. To find out why we’re looking at another massive housing market crash in the US just ahead, and what it might look like, get your free report, Get Ready for the Real Estate Reset: The Housing Market Will Crash and Burn.

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  21 comments for “China’s Property Bubble Echoes Subprime Crisis

  1. Vespa P200E
    August 2, 2016 at 12:22 pm

    Well I don’t know when the property bubbles will pop in China anymore as I’ve been expecting it to pop for last 2 years. Just too big of momentum to stop with what appears to endless fools to bid up in classic greater fool theory (in turn made a fool out of me for thinking it was going to pop for so long).

    I recall the last time housing price collapsed in Nov 2008. I was in Shenzhen on business and saw the real estate agent touts with signs literally in the middle of the street blocking traffic near my hotel. There were talks of suicides by the folks who bought a lot of flat using expensive loans from the loan sharks. But SZ real estate took off. Anyway the housing bubble got a lot bigger meaning it will pop with lot of noise with the sheeples protesting on the streets which is a modern day peasant uprising the Commie cadres afraid of as countless empires in China were destroyed by peasant uprisings.

    • Jerry
      August 2, 2016 at 3:09 pm

      I was expecting the crash much sooner too.

      But who could have ever predicted ZIRP, NIRP,CB’s buying bonds and equities and endless money printing. I call them all plate spinners, they will keep this going until they cant. The danger is the governments throughout the world are prepared to use what ever means they can to stay in power. All this will lead to war for sure.

      We are entering a very scary age. Politicians routinely lie to its citizens, banksters are let off with serious frauds when they should be in jail.

      Ayn Rand wrote a paper about, “The Meaning Of Money”. Quality money is the basis of a moral society. The hallmark of a collapsing society is when the state begins to debase its currency, so the west is in the process of collapse right now.

      The USA is very similar to Rome, a standing Army is very expensive to keep and of course you want to get your moneys worth and keep them busy, they have large unfunded commitments which are off balance sheet.

      If everyone was honest with themselves they would acknowledge that there has been no recovery since 2008 and the figures have been fixed. Some say that the USA unemployment rate has been more like 15 to 20%.

      Politicians will always take you to the crash and burn stage before you start calling them on their BS and that is where we are heading. The west has so much debt that mathematically it is impossible for them to ever pay it back which means only one option…… sovereign defaults, that is where this ship is heading and there is no way out now.

      • Vespa P200E
        August 2, 2016 at 4:11 pm

        “The danger is the governments throughout the world are prepared to use what ever means they can to stay in power. All this will lead to war for sure.”

        Great points Jerry. I used to go to China a lot on business from 1998 to 2009 – over 30+ times.

        My fear is that Chinese under Xi is entering a dangerous phase of rolling over with over-invested heavy industries faltering (and the SOEs laying off workers in droves), astronomical debt expansions unleashed since 2008 (China did suffer NPL related setbacks in the mid 90’s along with waves of SOEs closing), increasing unemployments with construction slow down and closings of export oriented factories, and lest we forget housing bubbles where many of the flats remain empty since the flats in China are sold with just barewalls and considered store of value.

        What is not talked about is the male female ratio of almost 120:100 due to the 1 child policy which was eased recently. This dumb policy created a generation of spoiled, lazy & entitled and narcissistic mama’s boys. History indicates that whenever there are high ratio of young men war may follow to trim a bit and bring back the war booties including new territories and women.

        Add this volatile societal mix to China’s recent belligerent and unreasonable claims to South China Sea and we have a recipe for WW III if not major clash between China and US in the open sea. US Navy is the all powerful and well lubricated machine and has engaged in many battles. Chinese navy on the other hand is new to blue water patrols and not been in naval battle since say when they were annihilated and humiliated by British and French back in the late 1800’s.

        And war is a great cover to divert the internal discontents and hold onto the power. So watch the South China Sea drama as this just might be the Black Swan folks have not taken into account as the instigator may not be Chinese but may be covert US (i.e., Gulf Of Tonkin and USS Maine, etc) or other US allies and even Russians. Heck Obama might just give Trump the biggest pain to deal with by starting a war.

    • MC
      August 2, 2016 at 3:22 pm

      I’ve read even housing prices in China have been hit by that phenomenon called “narrowing”: first tier cities have been doing very well, second tier are stagnating, third tier are falling and fourth tier are just getting hit over the head with a brick.
      In short those with the money and connections to buy housing in first tier cities (which are just four: Beijing, Guangzhou, Shanghai and Shenzhen) are doing well, the rest… they are lucky not to see their “investment” evaporate.

      This is superficially similar to the recent trend in Japan, which saw housing prices finally reverse after two decades… again here prices are driven by just two megacities (Tokyo and Osaka) with the rest of the country stagnating or worse.
      This is not what Haruchiko Kuroda had in mind when the Bank of Japan entered the J-REIT market like a bull enters a china shop: home prices were supposed to increase nationwide, not merely in the two premier markets.

      I suspect reliable data do not exist but I’d be very curious to know if the people driving housing prices in Chinese first tier cities are exactly the same as those still pumping air into the Sydney and Vancouver housing bubbles. I suspect they are and I also suspect they’ll wipe out themselves simply by driving prices to a point where they’ll either price themselves out of the market or will force authorities to prick the bubble to avoid people rioting in the streets. Better throw a few thousand parvenus under the bus than having to deal with the consequences.

      • Vespa P200E
        August 2, 2016 at 4:25 pm

        Chalk it up to the greater fool theory which states that the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price.

        I’ve seen the RE bubble twice in my life: LA in late 80’s, 2007 led by sub-prime lending and we may be near the top in 2016 with lot of money from Asia chasing RE in NA. Chinese purchases slowed down in US due to 10% RMB depreciation and tougher rule on getting the money out of China but sounds like Vancouver BC has gone hog wild (perhaps since CAD to at least USD went into tailspin?).

        Anyway when folks who wanted to buy RE already bought and demand slows then price of supply adjusts albeit slowly initially. Basically once the greater fools disappear – watch out below…

        • John S
          August 2, 2016 at 7:12 pm

          Since the supply of fools and their foolishness is unlimited the only constraint is how much they can borrow. Ultimately when the source of all this money is cut off you will know for sure the party is over.

  2. Mick
    August 2, 2016 at 3:51 pm

    The effects of the 15% foreigners tax on real estate are rippling through the Vancouver market, causing realtors, developers, and investors to howl. Hundreds of millions in deals have already collspsed in only a week.
    Can’t help but wonder if they did this purposefully just ahead of the bubble bursting in China, knowing China’s burst would overshadow this tax, thereby being able to pmi the crash on China.
    The timing was also interesting: only a few weeks after property taxes were due, so they milked people for maximum taxes, then hit them with the tax at the end of July, causing a frantic bunch of buyers to move their closing date up to avoid the tax.
    July’s sales will look good as a result, but august numbers are gonna be a pure horror show. Might need an event in august to cover for the drop.

    • Mark
      August 2, 2016 at 9:37 pm

      Maybe in Vancouver, but don’t forget that money is now being invested in Toronto real estate. Just this week i got two offers to sell my house (even though it is not on the market) for hefty price. Chinese brokers left me their cell phone numbers and this shit is real.
      I’ve talked to my friend who is known agent in GTA and he thinks that we are in immediate 7-12% house increase over night in Toronto and surrounding area (GTA).
      Thank you BC.

      • chris Hauser
        August 3, 2016 at 9:39 am

        as mortimer said in trading places: get in there and sell!

  3. Patrick
    August 2, 2016 at 4:55 pm

    I just got back from a trip to China. I was in Shanghai, Chongqing and Nanjing. I was also there in 2015 and 2014.

    On all of the trips I had a chance to take some train rides.

    I saw a number of the high rise “homes” that have the structure complete, but, no windows, not doors, no one living in them and no construction equipment anywhere in sight. In Chongqing, there were many of these chicken coops empty, and cranes building new unit next to the empty units.

    This will end badly, but, the Chinese Government is not accountable to anyone, and they have a pile of money and they can create a lot more. It will crash, but, do not hold your breadth.

  4. Chicken
    August 2, 2016 at 6:12 pm

    If you could buy your way out of a communist country into one offering democracy, wouldn’t you? The joke is on them it appears, not a lot of difference b/c we’re told what we can think and do as well, we’re never consulted.

    • John S
      August 2, 2016 at 6:49 pm

      The difference is that in western countries you still don’t have to worry about disappearing in middle of the night only to maybe reappear a few weeks later. For Chinese that have the means making arrangements to go elsewhere and sending their family and kids to that other place is just a prudent investment. Most of it is done with borrowed money anyway, in which case you have even greater incentive to make a backup plan.

  5. nhz
    August 3, 2016 at 3:02 am

    “Guess what happens when the bubble wealth in real estate that has built up in China finally collapses?”

    Dent doesn’t mention that the China RE bubble is VERY different from the bubbles in the West. Not only because many of the homes are unfinished and purposely bought as a ‘store of value’ for later, but first of all because subprime, almost-no-money-down lending like it was and is rampant in the West isn’t a factor in China. Many homes are still purchased with big downpayment of at least 30-40%.

    The leverage for most of the Chinese market is totally different from the situation in the West. If the bubble collapses the average Chinese will bear the cost, unlike in the West where others than the homeowners got the bill for all the speculation. And because most of the homeowners operate with very low leverage compared to what we see in the US and Europe, I would not bet on a fast collapse.

    Only in the hotspots some of the dynamics of US/EU RE markets may be present, but my guess is that this is more about storing black/criminal money for the elites (who are usually educated in the West and just as criminal as they are here …) than about easy lending from the banks.

    • AJT
      August 3, 2016 at 7:30 am

      I remember reading in a couple of different articles where the Chinese gov was starting to crack down on the shadow banking industry where some Chinese citizens obtain a loan for their down payment. So it may have more similarities but I can’t say for sure. No one really can. Of course we won’t know until a crisis because of the opacity that is China.

      • interesting
        August 3, 2016 at 3:04 pm


        I’ve read the same thing many places many times that the Chinese go to the secondary market for down payment cash. This no/minimal debt argument has been addressed before and maybe Wolf could shed some light on that aspect of things.

        I’ve done a quick google search to find an article in that regard but when you put “Chinese” and “real-estate” in the search all that comes up is those “pouring money into Canadian and US real-estate”

  6. Crazy'olTom
    August 3, 2016 at 8:59 am

    Fed says Demographics is the problem

    I suspect people will stop fOLLOWING ‘da fed based on recent statements by Yellin and Bullard. sources included
    Fed governors are saying that because of demographics and productivity the US needs some fiscal policies that drives more births.

    I hear Harry Dent out in the hallway. Someone should let him in!

    Now after eight years of QE1,2,3 we need policies that drive more births and THEN the economy will be back on track. C’mon. Elizar reported on this June 21st that Fed Chair Yellen blamed demographics and productivity for QE not working.

    Bloomberg reported today that on July 12th James Bullard said this (pay attention because this is fun), “Stimulus is something you’re doing to try to smooth things out over a couple of quarters, and that isn’t how we need to be thinking about the U.S. economy, We badly need a growth agenda.”
    That is code word for “it’s not working we now need fiscal policy to save us.

    While you’re at it consider other lessons of history:

  7. chris Hauser
    August 3, 2016 at 9:42 am

    no idea what is really going on in china other than it’s a big country with a lot of people.

    i like it here.

    one other thing, the figures mentioned in the article are unverified.

    but yes, things are unmoored.

  8. nick kelly
    August 3, 2016 at 10:05 am

    “Will the Chinese government spend billions buying its own stock market. That’s what the US government did in 1929 when its stock market crashed”

    I have read fairly extensively on the Crash and Depression: I have Galbraith’s The Great Crash on my bedside table, read a dozen times, as much for its wit as the info- not in it or anywhere have I heard of the US government buying stocks in 1929 or in the following years.

    About a week into the crash, Morgan ( the son of the Morgan who had stemmed a crash decades earlier) tried to stabilize the market with a bankers’ pool that made highly public purchases. It failed.
    But this ‘organized support’ had nothing to do with the government.
    In the ethos of the time, the idea of the government buying stocks would have been close to inconceivable- or at least heretical.
    For one thing, where would the government get the money? It was soon frantically cutting to try and balance its own budget- the idea that it could create liquidity had yet to occur.

  9. BRF
    August 3, 2016 at 2:35 pm

    I totally agree. The rise in private debt in China, mainly by real estate developers, brought that debt to equal America’s in six years, what it took the USA 17 years. Now the deleveraging is taking place while the Chinese banking fraternity desperately tries to keep the bubble inflated, but with no one to borrow for development inside China it seems the over the top speculation is taking place in foreign real estate markets.

    I also agree with Dent’s hypothesis that a deflationary spiral is likely in the long run as debt deleveraging or bankruptcy stalks the western economies.

  10. Sound of the Suburbs
    August 4, 2016 at 7:36 am

    If we say 2008 was a one off “black swan” event we won’t have to take responsibility for it.

    Just too appealing for elites, allowing their usual modus operandi.

    2008 wasn’t a one off “black swan event”

    “Minsky Moments”

    1929 – US (margin lending into US stocks)
    1989 – Japan (real estate)
    2008 – US (real estate bubble leveraged up with derivatives for global contagion)
    2010 – Ireland (real estate)
    2012 – Spain (real estate)
    2015 – China (margin lending into Chinese stock market)

    Irving Fisher looked at the debt inflated asset buble after the 1929 crash when ideas that markets reached stable equilibriums were beyond a joke.

    Fisher developed a theory of economic crises called debt-deflation, which attributed the crises to the bursting of a credit bubble.

    Hyman Minsky came up with “financial instability hypothesis” in 1974 and Steve Keen carries on with this work today.

    Steve Keen saw the debt bubble inflating in 2005.

    There are those that knew and the clueless bankers, central bankers and mainstream economists that didn’t know what hit them.

    2008 – “How did that happen?”

    After the bubble bursts you enter balance sheet recessions that Japan knows all about after having been in one for 25 years since 1989.

    They found out what to do:

    You need fiscal stimulus, monetary stimulus doesn’t work and austerity
    makes them worse.

    This is the sequence of events, get ready.

    Event 1 – Debt used to inflate asset bubble.
    Everything else just follows naturally.

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