The Chinese have a real estate bubble that could well bring down the entire world’s economy. From Harry Dent on a guest post at wolfstreet.com:
It’ll devastate China’s economy and reverberate around the world
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.
To continue reading: This Will Be Largest Evaporation of Wealth in Modern History
