“China’s Looming Property Bubble” is a well researched and very compelling account of China’s rampant real estate speculation. It clearly doesn’t bode well for the world’s most populous economy ‘going forward’, as they say.

However, having published a study (Unlocking the Riches of Oz) on Australia’s real estate bubbles since 1972, I wish Arthur Thomas had enlarged on his warning “Comparing China's property market with those of developed nations risks serious miscalculations” because, while the $2.4 trillion Australians expended on real estate between 1999 and 2009 doesn’t come close to matching China, the fact that at least 28% of our amount is within our bubble (and will have to be written off), makes Australia’s bubble as big as any in the western world.

In fact, as I ponder Arthur’s eight point closing summary, only point number 2 doesn’t apply equally to Australia. (Yes, we have our own ‘Ministry for Propaganda’. It omits to collect and collate Australia’s total real estate sales against GDP.

Nice piece Arthur.

Bryan, I think you also fail to take into account that in Australia, housing tends to be undersupplied.

In China the masses and masses of vacant apartment and properties are easy to see, even in central Beijing. In Australia however, there is a dire shortage of suitable properties.

Though I concur in regard to inflated prices.

He also failed to mention what the consequences of a failure in the Chinese economy will have to the Aussie mineral sector. We may well see some hard times ahead as sales of iron ore go down the gurgler when construction grinds to a halt..

David

TurnRightThenLeft, The deliberate under supply of housing is supporting inflated values here in Australia, But you must ask the question, Is this restriction of supply a good reason to bleed the public's scarce cash flows in effect to support green labors central planning? And what adverse issues are a result of these polices and at what loss of value and community cost? Why have a deliberate policy to squeeze the family budget?

Didn't say it's a good idea Dallas. Just said that it's a different kettle of fish to China's problem.

For a long time I would see the empty apartment blocks in Beijing and thought that this speculation was going to lead to a disaster in the imminent future. After all, with so many empty apartments, clearly it was rising prices fuelling further purchases fuelling rising prices, with a distinct lack of tenants.

Clearly this is going to lead to big problems, right? Particularly with failures being kept as state secrets via a muzzled press.

However, that was before I started thinking about this, and I mean really considering it.

The author briefly touches on the Hukou. The hukou is effectively a document that restricts people from being real residents of a city. They may work there, but their children can't attend schools there, they can't buy property, they're in effect a semi-legal squatter.

The mass migration in China has meant many migrant workers live in cities without really being a resident. Their options are limited.

So, after the imminent crash in house prices which follows every bubble, what will happen?

Seems to me, that the government has one hell of an ace up their sleeve. Relax the hukou permit rules. Suddenly, there would be mass migration and property purchases on a scale never before seen. In all likelihood, prices would rocket to their previous position, perhaps even further. Those holding properties wouldn't lose out after all, far from it. In many cases, they'll be rich and connected to the CCP.

Effectively, this could be the biggest case of, well, for lack of a better term (correct me if there is one), 'insider trading' in a property market there has ever been.

The madness in China will,sooner rather than later,come to a very bad end and it won't only be the Chinese who suffer.

Brian Kavanagh
There are major differences when comparing the Australian and Chinese property markets.

Understanding the effect of demographics on China's market demand is crucial in analysing its luxury apartment and villa market. It includes the effects of China's one child policy, the accelerating age gap, the rural-urban wealth gap, lack of social security and unemployment benefit in the rural sector, and real unemployment.

Also compare savings differential between the rural vs urban component.

The intensity to gain wealth in the lower level investor is driven by China's record economic rise and seeing the signs of growing affluence. Generated by 6 decades of grinding hardship and a repressive government, this intense desire to secure some of that affluence also relies on the belief that the investment will grow and the government will not allow it to fail.

A review of developers' presentations to investors can reveal "statistics" ranging from the over simplistic to outright fraudulent.

Unsold property translates into outstanding debt and accumulating interest and servicing costs. It is the scale, distribution and level of activity, especially by state and local government (direct and indirect) that is also important.

The large novice and naiive sector of the speculator market increases the level of risk for panic selling and foreclosures. Banks will foreclose first on the weak sector before working their way up the scale to favoured clients and finally the SOEs.

Without the level of unemployment and social security support in Australia, the level of risk in China is substantial.

Because of their numbers, the lower sector will hit the internet with complaints, triggering further panic selling in this sector.

Refer to "The China house of cards - Part II," OLO February 4, 2009 for more data that include extracts from World Bank and UN reports.

Thanks, Arthur, I appreciate your response. China's position is undoubtedly worse than ours insofar as its extreme exposure to overdevelopment. City incomes v. rural also differ greatly from our situation. So, sure, China has different aspects to its bubble.

My point, however, is that there remain significant commonalities between all of those countries experiencing speculative bubbles in land price. [Even the prices at which Chinese apartments are being sold infer a land price, because they are certainly well beyond the replacement cost of improvements.]

All countries involved in these speculative bubbles, each and every one of them, is incredibly and unsustainably debt-laden, whether publicly or privately, and the issue of sovereign debt must continue to come home to roost, like Brown's cows, over the next few years. (Cow's roosting?)

Australia is not immune. Our 'difference' is that we have majored in household rather than government debt. Those who see our prices as being high because they are demand-driven and that there is a shortage of supply have swallowed the line of the real estate industry. We are in the greatest bubble in our history and it's been of our very own making.

Unfortunately, those few countries, like Germany, without a real estate bubble of their own, will be brought down by their trading partners.

I see China as no better nor worse in its speculative endeavours, Arthur. In fact, as a command economy, it may even be able to take quick remedial actions for which we western economies are not noted.

What worries me with your otherwise excellent analysis, is that if China 'goes' and we follow, China will undoubtedly be blamed for our collapse when, in fact, though China may have contributed, it was our bubble that really did us in.

I saw OPEC blamed for the world's financial collapse following the bursting of the property bubble in 1973 (or Whitlam in Australia, take your pick), and this time I fear I'm going to hear it was all China's fault.

Bryan Kavanagh
Apologies for incorrectly spelling your name.

In respect to your second last paragraph, laying blame serves no real purpose.

China is a part,lthough beit a major part, of the problems created by the GFC, but has the potential to create a disproportionate level of global economic problems, should the bubble burst.

In the global economy, Australia's property bubble is only a blip and concern for Australia only.

China's bubble is a different matter with the ability to impact on the global economy.

China's unsold property debt chain will trigger a bigger problem with the potential to impact China's state banks, local government, and major SOEs and China's international commitments, and trigger civil unrest.

The problem is the real level of total debt hidden by legislation.

When scrutinizing China's domestic and foreign commitments with earnings and increasing environmental and social security debt, the maths don't add up.

Amortizing existing infrastructure stimulus spending with a slowdown in exports is another problem.

The stimulus boosted GDP but not earnings.

It is not about blame.

It is about risk assessment and the overall impact on countries reliant on China's growth to reduce budget deficits.

Australia's reliance on China's demand for our resources of iron ore, coal, and gas to reduce the level of the growing deficit represents such a risk.

Would contingency planning not be a priority for the Rudd government to prepare for a possible downturn in demand from China?

China's body language is also sending a clear message.

China's growing aggressive stance emanating from the Zhongnanhai has only increased since mid 2009 when it became apparent that the recovery from the GFC will not be short term.

Because of its potential property bust, China can trigger a global crisis, but China is only part of a global problem and blame has nothing to do with it.

We agree then, Arthur. Laying blame gets us nowhere. Just as it was wrong in the 1970s when the powers that be blamed the OPEC countries for the financial collapse (when the oil crisis had little to do with the bursting 1973 real estate peak), so would it be wrong to blame an imploding China for the secondary bursting of real estate bubbles in other countries.

I also agree that the bursting of the Chinese speculative bubble must have secondary fallout on other economies, the US and Australian being not the least of these, and your point here is well made.

But I'm prepared to bet that the blame game will once again be played by governments seeking to evade responsibility for their home-grown bubbles, and this time it will be China painted as the world's 'culprit'. I apologise if I unfairly read this point into your informative article.

Seems to me we need to address once and for all the fundamental structural problem in world economies. Virtually every nation fines real wealth creation, yet rewards excessive real estate speculation, to the point where property bubbles eventually burst with disastrous results. This needs to be reversed.

Public (instead of rampant private) capture of publicly-generated annual land values would go a long way to putting paid to this incredibly repetitive pathology, in China and elsewhere.