This Will Be The Largest Evaporation of Wealth In Modern History
The Chinese people are fanatical savers; even the poorer adults save an average of 30 percent of their income, and the wealthier save 60 percent or more.
But if diversification and asset allocation are the key to preserving wealth, then the Chinese get an F!Seven of the 10 most expensive cities in the world, relative to income, are in China. Ratios of 30:1 for dwellings are common in "Tier 1" cities.
The reason: 75% of their wealth is in real estate, with the rest largely in cash. They’ve over-invested in one illiquid and bubbly asset that they wrongly believe can only go higher. Relative to income, China has seven of the 10 most expensive cities in the world.
In urban areas, real estate has bubbled up between five and seven times just since 2000. It’s even greater than the unprecedented housing bubble in Japan in the 1980s, which suffered a 60% collapse that it’s never recovered from – even 25 years later.The ripple throughout the rest of the world's economies will be deep and long lasting.
A 60% collapse is the minimum the Chinese should expect. But it would actually take 80% to get back to the pre-bubble values of early 2000.
This would be devastating to the Chinese. It is estimated that household wealth in China is $27.2 trillion, or about three times GDP. With 75% of that in real estate, that comes out to $20.4 trillion.
If real estate falls 60% as it did in Japan, that would mean $12.2 trillion in wealth would just disappear.
And if it falls 80%-plus due to the larger size of China’s bubble like I expect, we’re talking $16 trillion or more evaporating!
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