The Chinese Housing Bubble Is Ready To Burst

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China Now Has 50 Million Empty Apartments—and Nobody Can Afford to Buy Them

Last week, Bloomberg reported that roughly fifty million homes—some 22% of all Chinese residential property—are sitting empty in cities across the country. This number—according to the survey’s organizer, Professor Gan Li, is the highest he’s ever seen, far outstripping vacancy rates in the rest of the world.

“There’s no other single country with such a high vacancy rate,” said Gan Li. “Should any crack emerge in the property market, the homes to be offloaded will hit China like a flood.”

It would be one thing if there were buyers for these vacant homes, but at their current prices—which are higher than anywhere else in the world when tied to country household income—no middle-class Chinese can afford to buy them. In fact, only homeowners who managed to get in on China’s housing bubble at the ground floor have the money on hand to buy new homes, and judging from recent statistics, that’s exactly what they’re doing.  

With housing prices in China at historically high levels, the only people able to afford new homes are families that already have homes. Today, over 70% of new home purchases are made by families who already own one.

So just how do the vacancies play into this?

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“There’s an economic cost to vacancies too because they’re a drag on supply, which puts upward pressure on prices and crowds young buyers out of the market,” said Kaiji Chen, author of “The Great Housing Boom of China.”

Families that didn’t purchase a home a decade ago may still be able to do so now, but they’ll need to take out substantial debt. However, trying to finance a new home isn’t a cakewalk by any stretch of the imagination, either. According to Caixin Global, outstanding mortgage loans in China have seen a seven-fold increase in the last decade, from 3 trillion yuan ($430 billion USD) in 2008 to 22.9 trillion yuan ($3.1 trillion USD) in 2017.

The Nightmare Scenario for China: A Mass Sell-Off of Real Estate

That rush to escape the housing market hasn’t happened—yet. But there’s growing fear that Chinese efforts to keep the housing market afloat cannot go on for much longer.

As Bloomberg reports:

The nightmare scenario for policy makers is that owners of unoccupied dwellings rush to sell if cracks start appearing in the property market, causing prices to spiral. The latest data, from a survey in 2017, also suggests Beijing’s efforts to curb property speculation — considered by leaders a key threat to financial and social stability — are coming up short.

So just how has China been able to keep housing prices stable for this long? The answer, of course, is debt. The government of China has been buying surplus inventory from home builders for years, keeping China’s economy booming in the process, to point that even Ben “Bailout” Bernanke would blush.

Meanwhile, according to the Wall Street Journal, some 200 cities across China have been buying surplus apartments from property developers with borrowed money. The whole operation is intended to move hundreds of thousands of impoverished families from condemned city blocks and nearby villages into newer homes. This program—which began sometime in 2014—has been extended out to 2020 with support from central-government bank lenders.

This tactic alone has managed to prop up housing developers and keep the property market intact. But it also begs the question: just how much debt is China’s housing market really sitting on?

A Tale of Two Superpowers: How Does the U.S. Compare to China?

China desperately needs its housing market to stay afloat, because as we noted previously, real estate accounts for some 30% of China’s GDP and a significant portion of its taxable income.

Moreover, China’s newfound middle class—which was non-existent some 15 years ago—has most of its wealth tied up in real estate. By some accounts, 74.7% of Chinese household wealth in 2014 came from real estate, and based on current trends, this figured has either remained very similar or even increased since then.

Compare this to American households, which in Q2 of 2018, totaled out to 107 trillion, with only $25.4 trillion—or 23.7%—relegated to real estate assets, on average.

Another key difference between the U.S. and China’s housing market is its debt. During the subprime mortgage crisis between 2007 and 2009, trillions of dollars in bad loans went belly up, leading to a 20% decline in U.S. household net worth, a 6% decline in the workforce, and a 30% drop in housing prices overall. That’s good news for Americans today, as our housing market has already undergone a significant risk off. Compare that to China, which has steadfastly maintained its own housing market bubble at all costs.

China’s roosters must inevitably come home to roost, and when they do, the global market—including the U.S.—will not escape its ramifications.

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