In a quick feature for The Economist’s The World in 2012, the editors invited readers to provide predictions for the year ahead in 140 characters or less. One such prediction caught my eye: ‘Africa will stay hungry; Asia will stay busy; EU will stay angry…’ True, whilst analysts are predicting a return to recession for much of the ‘angry’ EU – ‘definitely Italy, probably Britain’ is how one author described it – Asia is faring well. Estimates for 2012 put growth in Asia at a likely 7% or thereabouts. Further recession in Europe would be a speed bump to growth, not a roadblock. However, one point of concern is China, where the real estate bubble appears to be bursting.
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Real estate has long been a favoured investment channel in China, where alternative investment opportunities are somewhat limited. Having nowhere else to stash their cash, wealthy investors bought up multiple apartments, then kept hold of them, waiting for the selling price to go up and the profits to come rolling in. For some time now, this has not been going to plan. The apartments are not selling; the profits are not rolling. Real estate has been a massive driver of China’s growth, and China’s construction industry has provided a market for other industries and countries to sell to. If that disappears, the ramifications will be felt across the globe. In an article for Foreign Affairs (‘China’s Real Estate Bubble May Have Just Popped’, www.foreignaffairs.com), Patrick Chovanec explains: “The impact of a housing downturn would have a significant impact globally. International suppliers who have been fueling China’s construction boom – iron-ore miners in Australia and Brazil, copper miners in Chile, lumber mills in Canada and Russia, and multinational equipment makers such as Caterpillar and Komatsu – could be hard hit.”
So can we expect a real estate-led economic downturn in China similar to that seen in the US and elsewhere? Not likely. The bursting bubble is not entirely spontaneous, having been encouraged by the government, which is attempting to bring house prices to a more realistic level. Home owners in China have to put up considerable capital – at least 30% of the cost – in order to get on the property ladder, which is a long way from the problematic 102% mortgages offered by some of the British banks pre the 2008 crash. This outlay of capital is cause for much discontent amongst those recent buyers who are now seeing the value of their homes drop by 20, 30 and even 40%, if reports are to be believed. If prices are stabilised, new owners pacified, and prospective individual homeowners encouraged by the massive discounts on property, the crisis should be short-lived. With so many people still moving into China’s cities, a housing surplus seems unlikely. However, this could mark the beginning of a slowdown for the country’s construction boom.
Although cement is not on China’s import list, what we can take from the threat of any kind of economic disturbance in the country is the realisation of how much we all depend on the Asian Superpower. As a nation of vast and growing purchasing power and a driver of international growth, it has kept the global economy ticking over (if not always moving forward) when depression and stagnation in other once-and-future-Superpowers threatened to bring it to a grinding halt.