China's Housing Trouble Heats Up

You’ve seen the ghost cities before.

They stretch across the outskirts of dozens of major urban areas, criss-crossed by empty highways. The rows of modern skyscraper apartments are all sold to absent investors. There’s little doubt these scenes create compelling television…

But beyond, the gaudy, empty cities, China is now facing another property-related problem: housing slaves.

Middle-class workers in China’s major cities are reportedly shelling out upwards of 70% of their salaries for mortgage payments as they scramble to buy property in the face of rising prices. According to Bloomberg, the Chinese media has started to call them ‘fang nu,’ or housing slaves, ‘a reference to the lifetime of work needed to pay off their debts.’

Then there’s the investor class. Nouveau riche Chinese investors have gobbled up properties despite attempts by the government to put a lid on the red-hot market. Just this week, China instituted large tax increases on home sellers. The government is also calling on local agencies to institute price controls.

Yet no matter how much the government attempts to crack down on the housing market, it cannot suppress human emotions…

China’s economy is showing signs that it is entering the final, blow-off stages of its real estate bubble. Analysts and developers are sounding the alarm – but it cannot deter euphoric investors who have never seen real estate values dramatically tumble since the government changed property ownership rules 15 years ago…

Advance notice of this impending drop was on full display. The Shanghai Stock Exchange Property Index cratered nearly 10%. Stateside, the iShares Trust FTSE China 25 Index Fund and the SPDR S&P China ETF both dropped. All are recovering slightly – but I would expect continued volatility moving forward.

If you’re betting on China through any of these positions, it’s time to pound sand. The sheer scale of China’s property binge and the telltale emotional topping signs are emerging everywhere you look. When it really begins to sour, the shockwaves could make our little experience with a runaway housing bubble here in the States appear mundane…

Regards,

Greg Guenthner
for Markets and Money

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Greg Guenthner

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