Written by:
Andrea Schiller

The Chinese Real Estate Bubble: Waiting to Burst?

Luxury cars roll down the streets, million dollar penthouses float above. Women and children walk into high-end stores while men walk along the streets in pressed suits. What may sound like Fifth Avenue in Manhattan is far from it. Instead, Shanghai, is taking the main stage as the Chinese real estate market skyrockets. In Shanghai, China’s most populous city, apartments in the financial district are selling for $45 million dollars a piece. Better yet, three to four of them are selling a month. Some apartments are adorned with Swarovski crystal embedded in the doors, crocodile skin bedposts and Versace chairs resting on the floors. Apartments are selling for $2,300 per square foot, beating out the average Manhattan apartment cost of $1,900 per square foot, a shocking find. Currently, becoming a homeowner has become one of the main proprieties in the lives of the middle class. Chinese economic policies have allowed nine out of ten middle class urban families to purchase a home.

Hedge fund manager Jim Chanos is calling China “a treadmill to hell”, as "China is too dependent on driving growth through property development." And grow they have. Real estate prices in 70 cities have risen 11.7% since last year and $560 billion in residential property was sold. Investment in real estate has reached $96.6 billion in the first quarter; a 35% increase from last year and the government is planning to spend $59 billion in subsidized housing across the nation.

It is no surprise that China is in the midst of a real estate boom, but could this instead be a real estate bubble? “China the greatest is bubble in history with a massive misallocation of wealth”, says James Rickards, Senior Managing Director for Marketing Intelligence at Omnis, Inc., “it is a bubble waiting to burst”.

Does this scene remind you of something you’ve seen in the past? It should. The United States faced a very similar situation a few years ago. Real estate values soared and many quickly became rich. But, like every bubble that forms it must eventually burst. If China’s real estate bubble bursts as many predict it will, the consequences will be dire. When other booms have collapsed, national economies have been destroyed, but China offers a unique situation. If the Chinese economy were to crash, the rest of the world would be significantly affected since China is the fastest growing large economy and a critical tool in pulling the world out of recession. Cities such as Beijing have already implemented control measures to prevent the easy credit that has helped finance China’s development. In a city where the average resident makes $5,000 a year, 1,100 square foot apartments are easily selling for $200,000. People are buying things they simply cannot afford.

Let's see what will happen within the decade. Will the Chinese be making bank, or running from the bank?

Thanks to Wikimedia for the photo.