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China Cannot Afford to let Housing Bubble Pop

January 31, 2014 in Economics

By Mark Thornton

A recent study by Gan Li found that 90% of households in China own their homes and that housing is typically the largest item in household wealth. The study reinforces the idea that China has been experiencing a real estate bubble of epic proportions the popping of which the Communist Party cannot tolerate.

“The Chinese housing market is clearly oversupplied,” Gan told Tom Orlik, a Bloomberg economist based in Beijing. “Existing housing stock is sufficient for every household to own one home, and we are supplying about 15 million new units a year. The housing bubble has to burst. No one knows when.”

The pivotal role of housing in China’s economy makes the sector too big to fail. Nothing worries Xi’s government more than the specter of public unrest, which explains its increasingly aggressive moves to censor the Internet and mobile-phone texts. And nothing would unnerve the masses faster than watching 65 percent of household wealth evaporate in a matter of weeks.

At some point, China’s property bubble will explode. But for now, expect the government to pull out all the stops and borrow as much as needed to prop up housing values and, by extension, the nation’s GDP bubble.

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