This Will Be Largest Evaporation of Wealth in Modern History

It’ll devastate China’s economy and reverberate around the world

By Harry Dent, Economy & Markets Daily

Only a handful of countries have a higher savings rate than the Chinese do. For a still relatively poor emerging country with GDP per capita about a fifth of that in the U.S., the Chinese get an A+ in this area.

But if diversification and asset allocation are the key to preserving wealth, then the Chinese get an F!

The reason: 75% of their wealth is in real estate. They’ve overinvested in one illiquid and bubbly asset that they wrongly believe can only go higher. Relative to income, China has seven of the 10 most expensive cities in the world.

In other words, it has the greatest real estate bubble in modern history!

Price to income ratios in the top cities are off the charts. Beijing is 33.5 times income, Shanghai is 30.2 and Shenzhen is 30.0. The average condo in such tier I cities is only 650 square feet and would go for $460 per square foot, or $300,000. In a tier II city, we’re talking $100,000.

That may not sound like a lot, but the average Chinese are only making about $10,000 per year! That begs the question: how do they even do it on their incomes!?

Wade Shepard went after this question in a recent Forbes article. In China, owning your home is paramount. If you’re a man, you have zero chance of getting a date if you don’t. But with home prices running at exorbitant rates, what are their chances?

It all comes back to China’s phenomenally high savings rate. Compared with about 2% in the U.S., the Chinese on average save about 30% of their income. And for the most affluent, it’s more than double that!


But it’s also the family and friends network that helps younger people buy such massively expensive homes – typically without a mortgage. Only 18% of homes have a mortgage, compared to half of all homes in the U.S., and the minimum down payment on first homes is 30%. For second homes, it’s 60%.

So the last thing China has to worry about is a foreclosure crisis like the U.S. saw with high percentages of homes in negative equity.

China’s problem… is that they’ve invested their high savings in a massive real estate bubble and don’t realize the risks to their wealth!

In urban areas, real estate has bubbled up between five and seven times just since 2000. It’s even greater than the unprecedented housing bubble in Japan in the 1980s, which suffered a 60% collapse that it’s never recovered from – even 25 years later.Bottom of Form

A 60% collapse is the minimum the Chinese should expect. But it would actually take 80% to get back to the pre-bubble values of early 2000.

This would be devastating to the Chinese. It is estimated that household wealth in China is $27.2 trillion, or about three times GDP. With 75% of that in real estate, that comes out to $20.4 trillion.

If real estate falls 60% as it did in Japan, that would mean $12.2 trillion in wealth would just disappear.

And if it falls 80%-plus due to the larger size of China’s bubble, we’re talking $16 trillion or more evaporating!

How would the already insecure Chinese consumers feel (after past poverty and weak social safety nets) if their rapidly built wealth suddenly disappears?

It means they’re going to spend less money! That will halt China’s efforts at expanding into a consumer-driven economy.

This crisis in China will be the largest relative evaporation of household wealth in modern history. And it’s all from their overinvestment in one illiquid and bubbly asset: housing. Among urban households, 20% own two or more homes, near twice the rate in the U.S.

But the Chinese not only overinvest in real estate – they often buy empty properties for the future, or even for pure investment. They don’t actually use these properties. An independent firm monitored homes that were using no electricity and found a 27% vacancy rate.

Who would speculate in real estate with 27% of condos empty!?

So, yes, the Chinese get an A for high savings, but their Achilles heel is an irrational belief that real estate will only go up, up, up! That is the worst assumption you could possibly make in the very country that has the greatest overbuilding bubble and the most overvalued real estate in the world.

What I see ahead: the sucking sound of shrinking savings!

China’s unprecedented real-estate wealth implosion will make Japan’s look benign. Cities like Vancouver, Sydney, Melbourne, Singapore, San Francisco, L.A., New York, and London – anywhere that thrives on affluent Chinese laundering their money out of their country – will hear that sucking sound as well!

Real estate prices are beginning to plummet in many cities. With 75% of Chinese wealth tied up in real estate, the implosion of this bubble will trigger the domino effect, just when the foundations of the over-indebted economy are already cracking. It will devastate the economy and reverberate around the world. Harry Dent and his team released an investigative report on China’s forthcoming crash and its consequences. Click here to get it for free.

Enjoy reading WOLF STREET and want to support it? Using ad blockers – I totally get why – but want to support the site? You can donate. I appreciate it immensely. Click on the beer and iced-tea mug to find out how:

Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.

  36 comments for “This Will Be Largest Evaporation of Wealth in Modern History

  1. alexaisback says:

    Yes once — and if — the Chinese market implodes, Vancouver, Sydney, Melbourne, Singapore, San Francisco, L.A., New York, and London should follow,

    EG: sales in Vancouver, Sydney, Melbourne will be needed to cover losses in real estate and margin calls in China.
    The if is — will China politburo permit ” it “.
    . The Chinese Gov could step in and buy buildings, REITS etc.
    Just as they have bought stocks to ” save face “…..
    So this could go 6 months and crash, or
    6 years and crash,
    or 16 years and crash,

    funny money does funny things.

    • alexaisback says:

      EG: US – from what I am told and have read

      The greatest increases in the costs of Obamacare, are set
      to occur incrementally starting in 2018.
      So it was timed – for Obama to leave office and leave the blame
      to others. By design. By Design the costs will go up incrementally starting 2018.
      Do not wrongfully Judge the Chinese Politburo, they are the same as your own Politburo….

      • alexaisback says:

        Code Sec. 4980I, which applies to tax years beginning after December 31, 2017….
        In 2018, the employers of tens of millions of taxpayers from union members to city employees to self employed individuals will face a 40% tax on health insurance benefits that are currently received by their employees tax-free. ..
        Just one example.
        My Town School District This Year ( 2016 ) faces an 8 million dollar deficit, 3 MILLION of that is this years Obamacare/heathcare coverage.
        . And they have not bothered to project the increase in 2018.

        • Spencer says:

          Not enjoying my coffee this morning trying to connect your dots, a!

          Back to ZH then.

    • David Calder says:

      Somewhere between 30-35% of condo sales in Vancouver are to foreign born Chinese with about a 27% vacancy rate.. If real trouble breaks out in China this is their safety net.. I think China and by extension the whole world is heading for a rough patch but places like Vancouver, etc. will weather better than most. There will be no margin call in China; not with mostly cash buyers..
      I was first in Richmond, BC (greater Vancouver) around 1998 when Hong Kong buyers were getting what they could because of the British leaving HK and fear of what the Communists would do. I had been to Hong Kong 30 years earlier when I was in the US Navy and it was like I had never left.. The HK Chinese didn’t leave Richmond either and I doubt if the Chinese now buying in Vancouver will leave either.. If forced to make decision of where to live if there is serious trouble in China they’ll choose Canada.. Smart decision..

      • John Doyle says:

        Sensible comment IMO. The overseas Chinese possessions can take a hit but they will be just put down to a cost they have to absorb, as probably the lower value will still be good value for them. And they might be able to still live outside China.
        As far as the empty condos in China itself are concerned, the government, unlike ours, is determined to save the Party at any cost.
        So if it came to pass the unsold condos were demolished. the Government would build them all over again. The money is no problem.
        The problem is resources. It is a finite limit.

      • Paulo says:

        Bang on, David. They certainly will not sell US and CDN properties to repay losses in China. They won’t even be on the first plane heading east. Their kids are already living in Vancouver driving Bentleys. They will just phone and tell them to leave the outside lights on. I’m sure the ‘bug-out’ bags were packed long ago.

      • David in Texas says:

        One can make a good argument for the idea that demand for bubble condos in places like SF, Vancouver, Sydney, etc. will only increase as China’s economy looks to make a hard landing, or worse. We in the West have no real concept of what China was like even in our own lifetimes – the Great Leap Forward that killed 40 million +/- 5 million and the madness of the Cultural Revolution that killed millions more. The Chinese know that when things go bad in China, they can go very bad, very fast. In such circumstances, having a Plan B – in the form of wealth beyond the reach of the Chinese government – is the only logical response. If I’m Chinese, and I pay $3m for a condo in Vancouver that drops to $2m, I still have something I can either live in or sell for $2m, as long as I get out of China in one piece and can get to it. If I have a useful skill that lets me start making money again, so much the better.

        • Ptb says:

          The. Beauty of their purchases is that they are cash, not mortgaged. It is their safety net. This allows people to hang on a long time. Leverage is the monster that causes a dvistating drop.

        • interesting says:

          i just find it so odd that China is printing money like mad and going around the world and buying it up.

          but then i hear how the US dollar is as worthless as toilet paper.

  2. Chicken says:

    Of homes using no electricity, 27% are unoccupied? Sounds like a high percentage of people living with no electricity or ?

    • Jonathan Vause says:

      no 27% of apartments are permanently unoccupied, bought as a store of value. if that sounds crazy, it’s bcz it is; note that the major coastal cities have much lower unoccupancy rates, but inland there are ghost cities as far as the eye can see

  3. Shawn says:

    Let’s hope all this comes to pass. There is a massive over building of condos in San Francisco. Chinese and yuppies paying 1 to 2 million for a 2br shoe box.

  4. NotSoSure says:

    The BIGGEST evaporation of wealth is when the US Dollar eventually hyperinflates. But Dent is a US Dollar bull.

    • Nicko says:

      The USD is the last, best safe haven on the planet. There are no alternatives.

    • interesting says:


      and then what? let me guess, you’re one of those “the Yuan will be the next reserve currency” guys?

      please see my post above.

      never mind their printing makes every central banker in the world blush.

  5. OutLookingIn says:

    Real estate at 75% of investment total?
    Dent is on the right track, but his percentile is too high.
    The Chinese have an even bigger love affair with gold and silver.
    But Harry is a gold perma bear. Hates gold. So he ignores the high level of investment the Chinese apportion to precious metals.

  6. Islander says:

    when viewed rationally, too many condos is a good problem. I’m sure China would find a way to move villagers in if it became necessary due to market turbulence. Usually, too much of something is a more pleasant problem than scarcity! Even people who lose all when debt goes bad will atleast have somewhere to stay.

    • Petunia says:

      In NYC they are forcing developers to put low income units in with luxury units. You can bet that as luxury condos take a hit everywhere they will fill up with low income subsidized occupants. The Florida condo market is full of rentals picked up by condo boards to contain price decreases. There is a lot of underlying decay in the real estate markets that is being glossed over.

      China is tearing down new construction only because it is substandard not because they won’t give it away. In China they can afford to give it to workers if they want to.

    • Nicko says:

      That’s all well and good if you want to create ghetto slums….you still have to pay taxes and utilities to live in those condos. Consider the ‘value’ of those abandoned Spanish developments that were left to rot after the crash…many are still abandoned, valueless.

    • Thor's Hammer says:

      You are forgetting that those condos are bare shells with elevators that lack motors and cable, and were built without sufficient reinforcing steel and with concrete diluted with sand. Where do you think the money to buy a Lamgborgini for Number One Daughter in Vancouver came from?

      The peasants would be more secure with a 1/4 hectare of rice paddy and a mud shack back in the village.

  7. Andy M says:

    When people say that Chinese households save a lot, and especially when they say that these savings allow them safely to purchase over-priced real estate, I put my head in my hands.

    The saving of Chinese households are absolutely in line with the average for the rest of Asia. They are not particularly good or bad savers.

    People forget that an economy consists of consumption and savings (or investment) and nothing else: income can either be spent or saved. Household saving is but one element, and by no means the biggest – especially in China. Corporate and government savings/investment are also included in the savings element of national income. I am not making this up – I get my info from Michael Pettis. Savings is big in China because capex is big.

    In actual fact, Chinese households have been receiving a progressively smaller share of national income as the economy has grown over the years. That is the whole point of Xi Jinping’s reforms: to transfer income from the savings part to the consumption part of the economy, to halt the building of yet more excess industrial capacity and to instigate a service and consumer society. This has put him up against the ‘vested interests’ of the SOEs and at the moment it looks as if he is losing.

    As for citizens buying apartments, I think they are massively (over-) leveraged. If your income is $10k and you have no significant savings (as most of them don’t) and you need 10x gearing for the lowliest hovel, where do you get your money? Not from the bank but the shadow lending system – at much higher than official rates. Read this scary paper ( from Prof Keyu Jin of the LSE where she explains that only the big, party-connected and favoured corporates and regional admins get the good rates. In fact cheap credit pushes up the price of money for everybody else (not only private citizens but SMEs – the only efficient part of the Chinese economy) who are forced to pay through the nose in the shadow credit sector.

    It’s what Taleb would call fragile.

    • Nicko says:

      China has to make the transition toward a consumerist, services based economy, just like the US, UK, and everywhere else right? For this to happen, personal credit markets need to be liberalized, people need credit cards, loans, mortgages, car loans, bank accounts ect…. how can this be accomplished with the total absence of a social system or civil liberties to provide oversight and accountability?

  8. MC says:

    There’s an even bigger question nobody asks: what’s the Chinese secret for such enormous saving rates?
    Even the legendary Japanese savers never managed to pull that rabbit out of the hat: apart from a spike in 1974-1978, Japanese saving rates from 1960 to 1986 hovered around 15% before entering a long decline which took them to near zero right now.
    Yes, the Chinese are thrifty and work hard, but so did the Japanese.

    Something literally does not add up here: either China has discovered some financial secret I’d like to be privy of, or we are looking at yet more highly suspicious data emanating from Beijing. I’d have no problems believing China has higher saving rates than Japan used to have, but 30% sounds a bit too much, especially considering wages in China are growing, but not growing as fast as they did in Japan between 1960 and 1980.

    To move on to housing, the big problem Chinese savers have is their tiered market.
    First tier cities, the prime markets where every Chinese dreams of buying a house, are just four: Beijing, Shanghai, Shenzen and Guangzhou. Supply there is limited and demand remains very strong.
    But no such restraints exist in second to fourth tier cities, where the bulk of the Chinese population resides: hundreds or thousands of brand new apartments can be created by local authorities at the stroke of a pen and built in a matter of months.
    More supply and stagnating demand have already driven prices outside of first tier down, and will continue to do so. China won’t become a “service economy” overnight and local governors remain under strong pressure from Beijing to deliver GDP growth figures. The quickest and most politically convenient way to meet these goals is to keep on building, perhaps at a reduced pace, but there’s no other alternative. Hard to quantify services and central planning go ill together.

    • Nicko says:

      So, we have to wait for the first big bankruptcy to tip off the cascade of collapse, like the Asian crisis in the 90s’?

    • interesting says:

      “either China has discovered some financial secret I’d like to be privy of”

      peg your currency (at any number you like….ya gotta love that part) with that of the world reserve currency, print currency by the boat load, go around the world and buy it up.

      and there you have it.

      • shaba says:

        the peg has been used to keep China competitive (and ironically the US tried to call out China as ‘currency manipulators’ a few years back when the US was trying to devalue against everyone else), but it is also the aspect of their ‘trinity’ that is most under pressure (like the UK pound was when Soros broke it).

        You can’t have an open flow of money, an independent monetary policy and a peg.

  9. walter map says:

    Uh oh.

    The Chinese home bubble is problematic but at least it’s not totally inflated by mortgage debt so the owners could survive a major haircut. It might turn out to be the straw that breaks the global economic camel’s back but it’s certainly not the whole bale.

    The real problem is that the global economy is technically insolvent and gets worse by the day. The only viable recourse – forcing the rich to reverse their rapacity – isn’t politically possible.

    Collapse is inevitable and it has little to do with China:

    Negative rates point to the fact that the global economic system cannot generate sufficient income to service, let alone repay, its current debt. This is an attempt to maintain artificial current asset values and the debt that it supports. Artificially depressed rates only allow this excessive debt to be managed. It does not improve the real economy or enhance its productive capacity. In fact, the toxic side-effects of the policies are hindering economic activity.

    It gets worse the more you look at it.

    • Nicko says:

      There are still emerging markets with good growth prospects…though perilous.

  10. CENTURION says:

    This is not “wealth”. It is “appraised” value. These prices are just that, “price” and are represented by current units of exchange (Yuan, Fed. Reserve Notes).

    There is no “wealth”.

  11. chris hauser says:

    one needs to discount to come to a true measure of value.

  12. Mark says:

    I said long time ago on this blog that every asset known to humans have been devaluated over last decade, except for real estate, which is next to come.
    You don’t have to be, or read Mr. Dent to see this, but again open your eyes when awake.

  13. Bigfoot says:

    Something has never seemed quite right regarding China’s expansion over the past 2-3 decades. Maybe they built out their ghost cities for a specific reason. Adopting western finance principles, attracting foreign capital, building these ghost cities, accumulating large gold reserves while simultaneously pirating everything they get their hands on & all with record amounts of “manufactured money”. Add in the purchase of strategic properties all over the planet & I still haven’t seen a solid explanation of the JPM sale. Could there be a larger plan at work here? Has the Chinese power structure been really smart or is it the opposite? Sun Tzu applied to national economics?

    Perhaps instead of going to a full consumerism business model, they will turn back to a harsh communistic policy taking control of everything & ruling with an iron fist. Plenty of historical perspective to draw from regarding that slant. Now they have an abundance of new housing available for the workers in the ‘new’ state run businesses. Maybe they decided to join the worldwide debt party knowing full well that the majority of existing debt in the world cannot & will not be repaid. In the end, they walk away with a great deal of infrastructure, loads of pirated technology, & a mountain of gold. Just wondering out loud here.

    One thing that continuously bothers me with articles like this is the assumption that a number on a piece of paper is wealth. During the housing boom, the ‘implied’ value of my home skyrocketed. It eventually crashed back down. According to my finances, I neither lost or gained from this but according to many authoring similar articles, I lost quite a bit.

    At least the markets are doing great! Oh, sorry, not that one. I was referring the local farmers market.

    • Nicko says:

      China will have to sell that mountain of gold for a hefty discount once their foreign reserves are drained, or some other calamity hits. There’s a reason why China’s best and brightest are scooping up $2 bungalows in Vancouver or Penthouse in NY, it’s the only safehaven when the game of musical chairs comes to a screeching halt.

  14. While a large amount of IOUs, rubber checks, and poker chips may indeed go “up in smoke,” this was never “real” wealth in the first place. The U. S. went through a similar real estate bubble in the 1920s, [Florida land boom ] but the overall domestic US financial markets didn’t implode until 1929, followed by the collapse of the international credit markets in 1931, beginning with the collapse of Creditanstalt, and German War Reparations grift.

Comments are closed.