China's Massive Housing Bubble Will It Affect Us

    160 Million Units For Sale In China (vs. 3 Million In The U.S.)

    China has somewhere between 55 to 65 million unoccupied properties, depending on the source, and an additional 93 million units under construction.

    Famous financier, Hugh Hendry, was on this Rebel Capitalist Podcast in December discussing China’s extremely precarious property market – and tossing out these numbers.

    In contrast, the U.S. has about 1.5 million units for sale right now (per Barron’s) and about 1.5 million units under construction, according to this Substack column (which is also the most since 1974, so that is good news!).

    And yes, China has four times more people than the U.S., but its economy is only 70% as large as ours, and a four-times-larger-population hardly justifies FIFTY TIMES more inventory.

    I want to repeat that: China has 4x more people, but over 50x more inventory (160 million units) – in an economy that is 70% the size of ours.

    Enough Inventory Until 2050!

    Even worse, according to Mr. Hendry, is the fact that China’s population is not growing, so it will take China until the year 2050 to absorb its current level of inventory.

    The United States saw “peak inventory” of existing homes of about 4 million units in 2007 – and we ended up absorbing it all much faster than anyone anticipated.

    The Chinese economy is utterly dependent on housing as an industry, as real estate accounts for as much as 30% of China’s total GDP, and the value of China’s housing is about four times GDP (in contrast again, the value of U.S. housing was about 2x U.S. GDP at its peak in 2006).

    It’s A Bubble

    In other words, if it looks like a bubble, walks like a bubble, and quacks like a bubble, it’s a bubble.

    The only question seems to be – when will it pop?

    And – it appears to be popping now with the liquidity issues that developers like Evergrande have been having over the last several months (here is a NY Times article explaining why Evergrande is such a risk for China overall).

    How Will This Affect The U.S.?

    The United States is a mess too – with massive government debt, unfunded pensions, runaway inflation, supply shortages, political unrest, and much else.

    BUT – what saves the U.S. over and over is the fact that we are less of a mess than most other countries – who have either borrowed more than we have or who have other major economic problems such as slow growth, very precarious banking sectors, no population growth, and/or limited resources.

    Because of this, investors often have no place to go other than the U.S. when other countries falter.

    And – that will likely be the case if and when China’s housing bubble pops. Investors will likely pull out of Chinese investments (and other equity plays) and pour money into the U.S., particularly into U.S. Treasury bonds, as an effort to find a safe haven.

    And – this will likely drive rates down and probably a lot – which will in turn spark more homebuying and probably another refi boom.

    So… am I rooting for China’s downfall? Nope. Not even close.

    But – there is a strong likelihood that those of us in the mortgage and real estate industries could benefit from it.

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