One Hour China | China real estate is now like Dubai before the crash

There has been an eerie calm in Chinese real estate for the past couple months. People have noticed that real estate developers are cutting prices. They have noticed that banks are pulling back on lending. They have noticed that China’s first bond defaults since 1997 have occurred. It’s like everyone has stopped (or at least slowed) the real estate game they have been happily playing for the past decade and are quietly re-assessing the situation.

In October 2008, those of us in Dubai noticed a similar calm. For six years, we had enjoyed a housing boom. And we had all become well-versed in the rationalizations for why the housing bubble wouldn’t collapse (i.e., “it hasn’t crashed so far”, “the government wouldn’t allow it”). That had all ended the month before when housing prices unexpectedly began to fall. And what followed was a similar eerie quiet, like everyone was rethinking and holding their breath.

By December 2008, prices for new Dubai developments had dropped 40%. Real estate stock prices were in free fall. And publications such as the Economist were leading with headlines like “Has the Bubble Burst?” The calm was over and everyone was starting to take action.

In January 2009, foreigners began to leave the country in droves, abandoning their leased cars at the airport by the thousands. State-backed real estate companies began to realize they were facing massive lay-offs. Many real estate developers realized they weren’t going to be able to survive their debts at current housing prices. And the overall government debt at 150% of GDP suddenly went from a theoretical to a very real problem.

By July 2009, Dubai was a ghost town. The roads were no longer congested. It no longer took an hour to get across town. The restaurants and malls were spooky-quiet. Hotels were 50% cheaper than the year before. And apartment prices continued to drop by a cumulative total of 60% over the next year. The city would subsequently spend the next 3-4 years working out its debt and housing supply situations.

China today has some important similarities to that initial calm period in Dubai in October 2008.

First, everyone is re-thinking the situation – and market psychology matters.