The world's biggest real estate bubble - and what it means for the USA

I know some readers suspect I'm down on the USA due to the financial stupidity of its leaders: but such financial problems are far more widespread than this country alone. The European Union is battling to cope with a debt load at least as great (and, in some member states, proportionately greater), as a percentage of GDP, as that of the United States; and Japan, already at the bottom of a two-decade-long recession, now faces hundreds of billions of dollars of damage left behind by March's earthquake and tsunami. That's likely to prolong its recession by at least a decade.

China, which last month became the world's largest manufacturer (beating the United States into second place), is no exception. The housing market in that nation is almost completely out of control, driven by rampant speculation, outright official corruption, and lending practices that are fiscally unsound, to say the very least. So serious is the situation that China's central bank is desperately trying to cool down the white-hot property market by imposing stringent financing restrictions on home purchases.

Moody's Investors Service on Thursday downgraded China's property sector to "negative" from "stable" as it warned that rising interest rates and reduced bank lending would dampen demand.

It also said Beijing's policy moves to tame soaring inflation and ward off a property bubble -- including bans on second home buying and trial property taxes -- would hurt developers in some cities.

Home purchasing restrictions have taken a bite out of new home sales with volumes in Beijing down nearly 40 percent in the first quarter of 2011, compared with the prior three months, Moody's said.

. . .

The move comes as China tightens up lending and raises interest rates in a bid to tame inflation, which is sitting around five percent.

"The government's priorities of maintaining social stability -- by controlling inflation and containing any emerging property bubble -- will continue to heavily influence the direction of the property market," Moody's said in a report released Thursday.

The firm added the mix of policy and economic factors "will inevitably lead to slowing sales, and pressure on profit margins and on balance sheet liquidity for some (developers)."

As many as 10 major Chinese developers could face a cash crunch and be forced to tap the market, or shrink the the pace of their new projects, if sales dipped 25 percent this year, Moody's said.

There's more at the link.

The situation is made more serious by the sheer quantity of newly-built but unsold (and perhaps unsellable) housing units in China - estimated by one observer to be in excess of sixty million units (yes, I said over 60,000,000 units!!!). This in-depth Australian news report gives graphic details of the problem. I highly recommend watching the whole thing, to get an idea of the scale of China's impending crisis. It makes the US housing bubble look like a squabble over pocket change!

After watching that, it should be clear that China is likely to have more than enough domestic financial problems to deal with in managing its property bubble (plus other financial nightmares like its high-speed train wreck, to name just one). It will have little (if any) surplus capital to invest in US treasury bonds, as it's done in the past, thus keeping the US budget afloat. Without Chinese capital, and with European nations likely to be in financially straitened circumstances of their own, we're going to be faced with a stark, simple choice. Either the US balances its income and expenditure (which means cutting expenditure by up to 50%); or the US must continue with its present "quantitative easing" program (otherwise known as "printing money"), which will debase our currency and drive inflation to record levels, impoverishing most of us.

It's not a happy scenario . . . but it's coming. Prepare yourselves as best you can.

Peter