China’s Role in the Global Housing Market Bubble

China’s wealthy sector is looking for new countries in which to settle with their families and with their money.

This emigration is the leading factor in the sky-high real estate prices in some of the top cities in the world: New York, San Francisco, LA, Vancouver, London, Seattle, Sydney, Melbourne, Toronto and San Diego — to name a few of the most prominent. Their house hunting has helped bid up prices in these cities to levels where the average home in San Francisco is over $1 million.

If they keep this up, we’ll begin hearing that people are rioting because there aren’t any homes left…

I know… that’s not going to happen. But they can’t keep parking their assets abroad and think nothing is going to happen because there will come a point where the Chinese government, with its dictatorial authority, will put an end to it.

What will happen is that China’s unprecedented bubble will burst— and it will be worse than the Japanese real estate bubble. Japan was the up-and-coming No. 2 country in the world back in the day and they were busy snapping up real estate in hot spots like California and New York… when everything went south. And now things are looking the same for China.

The Chinese government is the real wild card. While it is still in the early stages of China’s bubble bursting, more wealthy people want to move in order to protect their wealth.

In surveys, the wealthy Chinese cite that there are three top reasons for leaving:

1) Better education and better opportunities for their kids.

2) Economic security (i.e., escape the Chinese government and its bubble).

3) Better climate (i.e., I can see the sun through all the smog and pollution.)

A bubble burst and economic collapse is going to accelerate reason #2 (economic security). The wealthiest Chinese are the “smart money” there and they fear that the government will expropriate their wealth and/or the government-driven real estate bubble will ultimately burst.

The wealthiest family in China holding some $30 billion recently sold off 10% of its massive commercial real estate holdings and is still looking to sell more.

The statistics suggest that there are about 1 million people in China with $1 million+ in net worth and the great majority of that money is in real estate. At 3.1 people per household or 400 million, that is only 0.25% of China’s households vs. 9.6 million millionaires here at 8.2% of households. (Learn more here.)

But the Chinese save much more money than we do and they also put much more of it into real estate… and they increasingly want that real estate in prominent English-speaking cities. So, on the margin they are a large influence.

Real estate bubbles around the world will burst on their own due to their extreme nature, and most are peaking. Look at London, perhaps the worst case with 15 times income and rising. Most other major western cities are less at 10%+… the range where California burst last time around.

The Chinese will be one of the major triggers in the next bubble burst. When they are looking to leave their country, the price of potential real estate is not a huge factor. So, they aren’t the savviest of buyers.

The wild card comes from the Chinese government cracking down. The wealthiest Chinese will only have more incentive to leave with as much money as they can if they see the China real estate and economic bubble starting to burst more seriously.

The question is how fast the Chinese government reacts and how fast Chinese wealth evaporates when the bubble bursts.

Major real estate bubbles, like the ones in China or Japan, magnify the wealth of their wealthy and it gives them greater purchasing power — and all they buy is real estate.

But when those bubbles burst, so does everything else. The wealth evaporates and so does the ability to keep buying. A case in point, in the early ’90s, the Japanese had to turn around and sell a lot of their trophy properties at major losses after buying them near the real estate peak in the late 1980s.

Because of the continued and increasing exodus of the wealthiest Chinese, these leading English-speaking cities may be the last to burst, but they will burst even harder in proportion to the foreign buying that drove them.

Australia has the best demographic trends for real estate of all these English-speaking cities. Left to its own, their real estate decline would be the least impactful despite some of the highest valuations outside of London. But the Chinese have an outsized impact on cities like Sydney and Melbourne due to the smaller size of the Australian population.

Wherever there is strong foreign buying, like in London, Vancouver or Sydney, expect the biggest falls. Wherever you see the greatest concentration of Chinese real estate owners, expect it even more.

If you’re thinking of owning a high-priced property in any of the cities mentioned in this article, think again. It’s just a matter of time and the natural physics of bubbles… every action has an equal and opposite reaction!

By Harry Dent