Will China’s Real Estate Bubble Do More Damage?

01/11/2012 6:30 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Many are wondering how much more the high real estate prices will hurt the Chinese economy, and MoneyShow’s Jim Jubak discusses what he sees as the likely scenarios for the coming months.

Everybody sort of agreed that the China economy is going to have a hard landing—that is, the economy is going to slow so much that it really creates a problem—not goes negative, but maybe gets down to 5% or 6% growth, whereas everybody says China should wind up somewhere around 8% this year.

Anyway, everyone has agreed that there’s a problem, and the likelihood of a hard landing comes in looking at the real estate market. They’re looking at the huge real estate bubble created by high prices in China, and the fact that the government has been trying to get these prices down, and that’s been leading to reductions in the number of sales as prices fall, and all this ripples out through the economy.

So, this is really the focus of interest. If you really want to figure out what’s going to happen with the Chinese economy hard landing or just sort of better than muddling through 8% as the low in 2012, real estate is your focus.

We’re just starting to get numbers for the end of the year. What we’ve basically got is a kind of private survey that says that between November and December, real estate prices in the 100 largest Chinese markets fell by .25% from November. That’s not a huge decline, but it’s certainly going in the wrong direction, and it makes like four or five months in a row where we’ve seen a decline in prices.

We’re also getting reports from some of the big property developers, like China Vanke, that are looking just at their December numbers, and what they’re showing is that—and they look at year to year, so it’s December 2011 versus December 2010—and what they’re seeing is a drop. China Vanke said about 30% in terms of activity.

So, they’re simply seeing less sales, fewer sales, and we’re seeing lower prices, and all that means that indeed we are seeing a slowing in this market.

We’ll get official numbers on the Chinese real estate market around January 18, from the government. That will give us a better read on whether the private sector numbers are accurate, although I think the private sector numbers are probably better than the official numbers in this case.

What we really need is a few more months that show, OK, are we getting close to an end? Do we have another 5% down here, 10%, or 15% as some people think, and is that enough to trip the economy into a downturn?

The Chinese government is watching this probably as carefully as you and I are. One of the things they’re doing is that they’re trying to keep their program of building 30 million units of government-sponsored housing alive over the next five years.

They’re talking about starting seven million units in 2012. That would pick up a lot of the slack—not from property developers, but from people who sell steel, carpet, and washing machines, and whatever else you need to furnish a house.

So, it will stop some of the effects of a slowing real estate market in the private sector from rippling out quite so far in the economy. And it will obviate at least some of the worries we have about a hard landing in China.

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