The property bubble which threats the world

The real estate business has been a secure investment for many countries. It provided great incomes to several countries. Ireland and Spain are some clear examples of these investors; Ireland became the “Celtic Tiger” and Spain was one of the largest world economies being very close to the  G8 countries.

In these countries, banks played an important role to increase the speculative activity, granting low interest mortgages, which often covered 100% of the property value. Later, the American banks, realizing that the business was declining, wrapped those liabilities and sold them to insurance companies, pension funds, etc. However, it all fell apart, and U.S banks had to be rescued by the Government. The same happened in Ireland and is happening in Spain.

Today, China is the threat. Its real estate has been growing at double digits since the eighties and in 2011 represented 10% of the GDP and employed more than 15% of the total active population.

The Asian giant consumed more concrete per capita than Spain in its boom in 2007. If this bomb explodes, it will affect so negatively to the world economy.

According to the estimations, there are more than 64000 empty apartments and it has caused the appearance of ghost cities.  Despite the efforts of the Chinese Government, the real estate price is going down.

In a real estate dependent economy as the Chinese, this could have a devastating impact. The assets value will decline, banks with a high degree of leverage could fail, and those which enjoyed a better cash position could stop lending money.

It would affect the investments dramatically and families would prefer to save their money and reduce their goods and services demand. Companies will need to produce less so unemployment rates will be likely to increase. Unemployment will contract even more the demand of goods and services.  If we take into account that the Chinese economy is a key factor for the American and European economic recovery, the damage to the global economy would be tremendous.

China is too big, and if we like or not, its economy must be supported by the other great economies to avoid a greater world recession.

Sources and more information| BBC , Forbes, El blog salmón

Image | Daily Mail

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Author Spotlight

Daniel Jurado Ruiz

Dani Jurado

Currently working as senior auditor for a Big Four Company in Belfast, UK, previously worked in an import and export company in Shanghai, China.

BBA at ETEA Business School (Córdoba, Spain) and having studied at The University of Birmingham (UK: BBA & EBBS), and at Kyungsung University Read Full

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