For almost three decades, China had been nothing short of a financial success story. With its state-controlled economy, the country managed to navigate its way out of the remnants of communism to become the world’s 2nd largest economy. However, major players in the financial and investment industry are now expressing their fears towards the Chinese real estate market.
In the past few years, Chinese authorities have largely concentrated on real estate and construction. In March last year, it was actually reported that China may have created the largest housing bubble in history. If you visit the country, it’s easy to see where all this talk about a real estate bubble is coming from. Houses, districts and cities are being built, but there is no one to live in them. Regardless of this situation, more and more people are embarking in real estate projects, without carefully looking at the market.
In addition, China’s emerging middle class have the money to invest in high-end residential and commercial, but there are very few ways to do it. According to Chinese real estate experts, things such as the inability to invest abroad, paltry returns from banks and a rollercoaster stock market, play a major part in China’s bubble.
How it developed
The Chinese government has spent almost $2 trillion in construction as a way of keeping the economy growing. They based their strategy on the assumption that if you build it, they will come. However, this has not been the situation on the ground.
Each day, more and more people in China are moving into major cities. Despite of these mass migrations, they still can’t afford the high cost of apartments, some of which are as much as $100,000. These are simply poor and middle class people who need some form of affordable housing. In addition, they had to tear down the premises that were there before in order to build these new massive security cities.
These are just some of the immediate casualties that have resulted from China’s building boom. Analysts are now warning that all this building has created a bubble that will most likely burst and multiple classes of people are going to be wiped out. In addition, those who have invested 3 generations worth of savings (grandparents, parents and children) into real estate properties will see their savings vanish. The 50 million constructions employees currently working in this industry will also be out of a job.
When it might burst
The prognosis of a bubble burst does not only come from the financial experts, but also other relevant institutions. Due to the building boom, the government and private investors have focused more on construction projects than on the impending danger. Just like in the United States, everything in the real estate market was good until the bubble burst. China will also head in the same direction if something is not done to quickly address the issue.
To try and prevent this looming disaster, the Chinese government decided to take various steps. In 2011, it adopted a one apartment policy, whereby it become very hard for anyone to buy more than one apartment in China’s major cities. As a result, the prices significantly dropped and the bubble was pacified to some extent. However, this move created all kinds of unintended consequences. Some of which include abandoned real estate projects all across China, unemployed construction workers and a downturn in the overall economy.
If the Chinese real estate bubble explodes, the government might not be able to control its adverse effects. As a result, top leaders in China are currently doing their best to sort out the problem and avert disaster. However, the situation still remains uncertain.
In the meantime, the people who can afford to buy are taking up as much real estate as they possibly can. They are even finding ways to circumvent the one apartment restriction laws found in most Chinese cities. The real estate market in China is currently in full swing. People are still embracing the boom. Potential buyers, new owners and construction moguls are lining up to register their projects. Just like the American real estate bubble, they don’t believe that the good times will ever end.