American homeowners wondering what follows a housing bubble can look to China’s largest city.

Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices.

For the first time, homeowners here are learning what it means to have an upside-down mortgage -- when the value of a home falls below the amount of debt on the property. Recent home buyers are suing to get their money back. Banks are fretting about a wave of default loans.

“The entire industry is scaling back,” said Mu Wijie, a regional manager at Century 21 China, who estimated that 3,000 brokerage offices had closed since spring. Real estate agents, whose phones wouldn’t stop ringing a year ago, say their incomes have plunged by two-thirds.


Shanghai’s housing slump is only going to worsen and imperil a significant part of the Chinese economy, says Andy Xie, Morgan Stanley’s chief Asia economist in Hong Kong.

Although the city’s 20 million residents represent less than 2% of China’s population of 1.3 billion, Xie says, Shanghai accounts for an astounding 20% of the country’s property value. About 1 million homes in Shanghai alone -- about half the number of housing starts for the entire United States in 2004 -- are under construction.

“They’ll remain empty for years,” Xie said, adding that a jolting comedown also was in store for other Chinese cities with building booms -- including Beijing, Chongqing and Chengdu -- though other analysts say the problem is largely confined to Shanghai.

Shanghai’s housing bust comes after a doubling of prices in the previous three years, a run-up fueled by massive speculation. With China’s economy booming and Shanghai at the center of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up. At least 30% to 40% of homes sold were bought by speculators, says Zhang Zhijie, a real estate analyst at Soufun.com Academy, a research group in Shanghai.


“Ordinary people had no option but to follow the trend,” Zhang said. “Worrying that prices would be even more unaffordable tomorrow, many of them borrowed from relatives and banks to buy as soon as possible.”

The Shanghai government only pushed the market higher, he added. “Many of the officials said Shanghai’s property market was healthy and wouldn’t drop before the World Expo” in 2010.

For Wang Suxian, the tale of two lines illustrates how the bubble has burst.

When home prices were at the tail end of the boom in March, Wang hired two migrant workers to stand in line for a chance to buy units in what the developer said was modeled after an apartment community on New York’s Park Avenue.


The workers waited 72 hours, including cold nights, but the 35-year-old was thrilled to come away with two apartments, one for $110,000, about the average price for a new home in Shanghai, and another for $170,000. They were among Wang’s four investment properties.

And for a short period, Wang believed she was raking in hundreds of dollars a day for doing nothing, as property prices in the city kept soaring.

But today, prices at the complex have fallen by a third, and the lines of frenzied buyers are gone. Wang is among dozens who are fighting the developer to take the apartments back.

On a recent frosty morning, she stood in a line herself with about 40 other buyers outside the builder’s headquarters, demanding that it negotiate a deal to return their money. “This is ridiculous,” Wang huffed.


The company, Da Hua Group, invited Wang and other homeowners inside, served them hot tea, then told them to forget it.

“I think it’ll take at least three years before the property market becomes healthy again,” said Zhu Delin, a finance professor at Shanghai University and former head of the Shanghai Banking Assn.

The typical home being built is in a high-rise complex, with two bedrooms and about 850 square feet of living space.

Developers say many of Shanghai’s homes are valued at about $70,000 or less, and price drops haven’t been as steep for those units.


Some still see promise in the Shanghai market. Incomes are rising and droves of people are relocating from the inner city to outlying areas, said Richard David, managing director at Macquarie Property Investment Banking China in Shanghai.

What’s more, he says, the Shanghai government -- which owns all the land -- has auctioned off few lots in the last two years, which will limit the number of housing units in the future.

But that’s little solace for homeowners who have seen inventories rise even as buyers show no hurry to come back into the market.

In Shanghai, people blame the popping of the housing bubble on the central government, which has applied one measure after another in the last year to quash excessive speculation and price increases.


Banks were ordered to raise their best rate on home loans to 5.5% from 5%. Home buyers were required to make down payments of at least 30%, up from 20%. A 5.5% capital gains tax on home sellers’ profits was imposed. Beijing also levied a 5% tax on the sale price of homes sold before two years of ownership.

“It’s killed the speculators,” said David Pitcher, a Shanghai developer and former head of CB Richard Ellis’ office here.

Before the market swooned, buses would bring investors from the southeastern coastal city of Wenzhou in Zhejiang Province on home-buying missions here. They no longer come.

Wang, the woman battling Da Hua, is one of tens of thousands of Shanghai home buyers from Wenzhou, known for its wealth and business prowess.


But it’s not just speculators who have bailed out of the market. A lot of potential Shanghai buyers have been scared off by numerous reports of sinking home prices and desperate action by some owners.

Internet chat rooms recently were abuzz with a story that a Taiwanese man had jumped from the 33rd floor of an apartment tower about 15 miles northeast of downtown. Many people suspect that he killed himself because he was drowning in debt after his home investments went sour.

Managers at the complex refused to comment, but brokers indicated that the price of some units there have plummeted by more than 50% since March, when a home fetched as much as $250 a square foot, similar to housing prices in some Southern California communities.

Zhang Wei, an editor at Imagine China, a photography agency in Shanghai, was close to buying an apartment in the new Pudong development area last year.


The 25-year-old planned to use his $1,250 in savings, and his parents -- a policeman and a doctor -- agreed to contribute about $30,000. The family of three currently lives in a 550-square-foot apartment in an industrial district that was provided by his father’s employer, the Police Bureau.

Zhang walked away from the deal after the central government stepped up its campaign to cool Shanghai’s market. He noticed prices beginning to drop. “When two of the four real estate agencies near our home finally closed, I decided not to buy for at least two years,” he said. “Even a 1% drop in prices is a lot of money for us.”

For Shanghai, prolonged weakness in the housing market could be very painful. Like Los Angeles, Shanghai relies heavily on real estate to drive its economy. Morgan Stanley’s Xie calculates that property sales directly accounted for about half of $31 billion of the growth in Shanghai’s annual economic output from 2001 to 2004.

Construction cranes still fill the skyline of Shanghai, an area of about 2,200 square miles -- a little more than half the size of Los Angeles County. But there’s sparse development in the center of the city, where strong sales of high-end homes and luxury office suites, in large part by foreigners, belie the losses around it.


Shanghai’s government is relocating inner-city residents to new suburban areas, where entire towns are going up as part of a plan to build distinct industries that ring the city.

It’s unclear how many of these new homes are sitting empty. Sales and inventory figures aren’t provided by the government. But analysts say they can see the surplus of housing when they drive past housing complexes and there are few lights on at night.

Few analysts are betting on a quick turnaround. Yin Zhongli, an economist at the Chinese Academy of Social Sciences in Beijing, says a housing crash takes time to clean up. He worries that the financial sector will be crippled by the real estate fallout. Last year, he said, 76% of all bank loans in Shanghai were in real estate.

“Now is the time to swallow a bitter pill,” Yin said.


That’s what Huang Xiaolei is doing. The 25-year-old Shanghai native nabbed a 1,700-square-foot apartment from Da Hua during the heady times last spring. The unit wouldn’t be completed until the end of the year, but as is customary in China, Huang had to secure a loan and make the down payment right away.

She and her parents pooled their life savings of about $80,000 and put 30% down on the $270,000 home. In April, they began making monthly mortgage payments of $1,100 on a 30-year loan with a 5.5% interest rate.

In November, Huang decided to stop the monthly payment, and this month she filed a lawsuit against Da Hua, claiming her contract allowed her to rescind the purchase before the house was completed under special circumstances, with a 3% fee.

“We have over 40 cases like this at our firm,” said Du Yuping, Huang’s lawyer.


Huang regrets that she got caught up in the frenzied market, and says that even if she wins the lawsuit, she’ll suffer a hard financial loss.

“I was cheated,” she said.