New Housing Bubble

Housing prices are skyrocketing in China’s largest cities. A good example was evidenced in the March average housing prices in Beijing city. Prices in Bejing increased by 60 percent year over year! Property sales for April were down slightly from March’s level but remained 27.5% higher than a year earlier.

To keep the boom from bust, China raised the minimum down payment on second homes to 50% from 40%, told banks they could decline mortgage applications for third homes and increased the supply of land for building low-cost housing. Some cities, such as Beijing and Qingdao, have since announced even more-stringent policies.

The risk of a sharp correction in China’s housing market and asset markets when the economy slows down is a real possibility. There is also a risk of a pull-back in lending activities if banks are under pressure to meet the capital adequacy requirement of 8 percent. If credit lines are pulled, it could potentially aggravate the correction in the asset and real estate markets.

The big question is, would a housing bust in China have a negative effect on the US market? China is our largest lender (by purchasing our Treasury notes). If their banks need to raise liquidity, we may well see China go from a buyer of our financial instruments into a net seller. Such a situation would force our own interest rates higher and may translate into a major U.S. credit crisis.

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