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Next Bubble - China's Housing Sector

I suspect the next bubble will be in China Real Estate sector. A number of causes are: Low interest rates, official encouragement of bank lending, and China’s $585bn stimulus plan (17.8% of their GDP) all have  made funds readily available. Some of the consequences are:

1)      Property values in China's urban centers skyrocketed in 2009. A typical 1,000-square-foot apartment in Beijing now costs about 80 times the average annual income of the city's residents (data from Bloomberg), wildly out of line with the historic levels of three or four times annual income.

2)      Most disturbing consequence is about 90% of the new construction is aimed at the luxury market, which is unaffordable to the average Chinese household. As a result, thousands of new homes are sitting empty, purchased as investments not as places to live.

3)      Local Governments are encouraging the developers as up to half of all their revenue comes from selling state-owned land to private developers.

4)      The main driver of mounting housing prices in China isn’t short-term speculation but longer-term investment of empty apartments as a “store of value”. There are no property taxes in China, so the costs of carrying speculative (empty) homes are very low.

5)      Many view owning investment properties as a low-risk, long-term investment. This phenomenon is partly due to a limited range of other investment options.

If housing turns down in China, China's growth could slow down. And since the entire world is looking to China to lead global growth, then that could spell major trouble.