August 8, 2014

Anticipation: The Feel-Good Moment Before Collapse

Do you remember bubblegum? A cheap sugar rush of candy-pink chewiness. We blew bubbles as big as they would go, before they ended up as sticky scum on our noses. That was part of the thrill, getting them to be as big as possible. And laughing when they burst.

Photo: Nicole Berna, FineArt America
Except for the laughter, economic bubbles are no different - and with the housing bubble, each "hopeful" homeowner keeps blowing hot air into it. Until it bursts.

A recent segment of CBS's 60 Minutes featured this astonishing look at the housing bubble in China. Can you believe that developers there have actually built some 25 cities, complete with shopping malls, infrastructure and high-rises, that now stand EMPTY waiting for buyers? They call them "ghost cities," but not because they have been deserted - because they have never been occupied. It's a bit unsettling to see these massive testaments to "build it and they will come." See photo below.

The documentary looks closely at a city that was recently visited by a friend of mine. He confirms that, in fact, everyone in China is buying up real estate as if there is no tomorrow. The average person owns three: One to live in, one to rent out (and live on the income) and one to flip when the market is favourable. Given their communist status, the Chinese have few investment options; housing is (or was) the most lucrative. Apparently, though, so many have taken advantage of the situation that the government has has to step in and implement a "one home only" policy, similar to the "one child only" one that sought to curb their population explosion.

So what happens if the housing bubble in China bursts? A catastrophic cascade, according to experts. For one, these expensive ghost cities will begin to crumble. They will have been built for nothing. Projects half-way completed will be stopped. Labourers will lose their jobs and suppliers go bankrupt. The resulting unemployment will push people back into lower-cost housing, putting them right back to where they were.

It seems that China's fragile economic balance is based on keeping spending and consuming at an all-time high. Of course, this is just what's needed to make the bubble bigger. So it seems like short-term thinking at best. Unfortunately, economic policies around the world are now competing for "best" when it comes to short-term thinking.

Feel like some crazy consumption? Head to China. Call me when your penthouse is ready for visitors.

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