One of the most common explanations for the Great Recession or Financial Crisis of 2008 was the explosion in low quality loans that led to a massive bust in the real estate market. So many people were ‘flipping’ homes on no asset/no job/no income loans that there was a huge glut of properties on the market waiting to be ‘sold.’ Eventually, the market got in over its head and imploded since there were no buyers for the inflated prices of the existing real estate inventory. Classic case of speculation pushing up prices that far outstrip sustainable demand. While we can argue all day and night as to which factors REALLY caused the economic tsunami of 2008 that sent the world into recession, one thing is clear: the same perfect storm might be happening again. This time, it is going to happen in the one place in the world that was largely spared by 2008’s financial meltdown. We are, of course, talking about China’s overheated, glutted real estate market.

Millions of homes unsold

The interesting thing about China’s real estate market is that, unlike the US market with uses real time pricing, the Chinese real estate aims to sell inventory at ‘official’ prices. The scary thing about this is that the ‘official’ prices are elevated and people aren’t buying. Consumers have held their cool so well that prices have started to drift down.

What do developers do? They simply hang on to their inventory and let it go unsold. Frightening. As of this writing, there are millions in unsold housing units in China because real estate companies and developers won’t adjust their prices downward. This wouldn’t be as worrisome if the developers paid cash or their own capital for these units. Most development, just like in most other parts of the world, are financed by bank loans or other types of loans. This puts developers in a tight spot because of loan interest obligations. However, they can’t just release inventory into the market because this will have the all too predictable result of depressing pricing even more.

Considering the slowly developing downward spiral in the Chinese official and unofficial financial markets, one can be sure that this will have an impact on the rest of the globe’s financial markets. It remains to be seen just how bad and severe the contagion will be. Our best guess: the US and Europe won’t be hit as bad as Southeast Asia and other regional East Asian finance centers. If 1997 gives us any guidance, the contagion will hit regional nearby markets then start to influence the US and Europe. Unfortunately, unlike 1997 when the US and EU stock markets were rocking, the US recovery is still firming up and solidifying for the middle class while EU is, for all intents and purposes, in a slump. We’re in a much more vulnerable situation now than in 1997. This is precisely why a Chinese financial crisis could prove to be devastating to the rest of the world.

Jacob Maslow is a native New Yorker with five children. He left his payroll manager position after finding that his true passion was in writing, and has never looked back.