China's housing bubble shows signs of bursting

After years of housing prices gone wild, China's property bubble is starting to deflate.

Residential prices are heading downward in some major cities, damping some undesired real-estate speculation but raising the prospect that the Chinese economy may slow more rapidly than anticipated with profound consequences for global growth.

Real estate is a foundation of China's phenomenal growth record in the past two decades, and its health is crucial to China's construction, steel and cement sectors. Real estate is also a favored investment of Chinese looking to get better returns than bank deposits pay. Local municipalities and provinces depend on rising prices for land sales as well to fund infrastructure projects.

World Bank economists warned at a Beijing press conference yesterday that a real estate bubble is among teh biggest economic risks that China faces.

Prices have already fallen 4.9 per cent in nine major cities since April last year. Prior to that, prices in those areas had risen 21.5 per cent from the year before. Standard Chartered Bank forecasts price cuts of 10 to 20 per cent "in many cities".

A downturn in property and apartment prices would harm Chinese industry and investment, and crimp consumer spending. China is a "housing-led economy", says UBC economist Jonathan Anderson, who estimates that property construction alone accounted for 13 per cent of GDPi n 2010, twice the share of the 1990s.

Any reduction would have deep consequences. The global economy is now even more dependent on China for demand for anything from commodities to luxury goods, given the tepid recovery in the US and Europe's continuing sovereign-debt problems.

If the Chinese housing market slows faster than people had expected, the impact would be felt in a number of markets that export heavily to China.

It will also be felt here in Vancouver. With less money coming in from our Asian neighbours, there will be a strong impact on the city's current housing market.

Source: (in part) Bob Davis, The Wall Street Journal