China Real Estate: A Bubble Is Not A Bubble Until The Money Runs Out

Many of China’s banks and financial regulators are concerned that real estate prices in the People’s Republic are too high. This is not a new assertion. Investor and analysts around the world have been concerned about the tremendous growth of GDP on the mainland and the liquidity produced by the country’s $585 billion stimulus package.

“Risks associated with home mortgages are growing and a`chain effect’ may reappear in real estate development loans, the China Banking Regulatory Commission said in its annual report published on its website today, “according to Bloomberg. Sky high real estate prices could cause a large number of defaults as Chinese home owners face a potential rapid drop of the value of equity in their home.The Chinese could learn something from the US real estate problems which began as the value of houses hit an all-time high in 2006 and then dropped as much as 30% by 2008 and 2009. Real estate loan default rates and foreclosures rose at a rapid pace. Banks took large losses. People were evicted from their homes or simply walked away.

The Obama Administration $75 billion homeowner aid package was put into place once real estate prices had already plummeted. That has not happened in China — yet.

The Chinese government could choose to lower the monthly payments of homeowners who face mortgages at risk for default because the value of their houses have risen to levels which are clearly irrational.

The case against helping Chinese homeowners is clear, just as it has been in the US. People who do not need money to pay their mortgages will make claims that they require capital to meet their obligations. Some of these people will get funds. That fraud is inevitable in a system which has to examine hundreds of thousands if not millions of home loans to determine which are likely to be troubled.

China clearly has more power over the financial activities of its population than the US does. China may need to decide to exert that power to get out in front of a possible major collapse of real estate values in the country which could easily occur if the home price bubble, if it indeed exists, explodes.

There is a lesson in the massive devaluation of American residential real estate which is that the US addressed the problem far too late. Washington never saw the problem coming. That is not the case with the Chinese.

Douglas A. McIntyre