Roughly 1 year ago we explained why the "fate of the world economy is in the hands of China's housing bubble." The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth would keep rising. However, unlike the US where the stock market is the ultimate barometer of the confidence boosting "wealth effect", in China it has always been about housing as three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US with the remainder invested financial assets.

Beijing knows this, of course, which is why China periodically and consistently reflates its housing bubble, hoping that the popping of the bubble, which happened in late 2011 and again in 2014, will be a controlled, "smooth landing" process.

As the Wall Street Journal notes today, a similar bubble was blown in Chinese real estate starting in mid-2015 through 2016 but only time will tell if the current bursting of this latest bubble iteration will be as controlled as the previous cycles.

In Beijing and Shanghai, two of the country’s largest real estate markets, residential sales have stalled and prices have dropped as a result of government measures intended to curb speculation including higher mortgage rates, higher down-payment requirements and limits on buying a second or third home.

Prices of advertised new Shanghai homes decreased 8% from October through mid-December, according to Brandon Emmerich at Granite Peak Advisory, a New York research firm that analyzed over 20,000 daily listings from Anjuke, a Chinese property-listing platform. But a slowdown can have a wide impact. China’s property market accounts for a significant share of economic growth—as much as a third, according to Moody’s Investors Service—sending ripples outward into the global economy. The property boom stoked imports of housing materials, cars, appliances and other products. UBS called Chinese property one of the major engines of global growth in 2017.

The problem, of course, is that with each successive real estate bubble Chinese families are taking on bigger and riskier loans to buy investment properties. And, as 29-year-old Luo Chuanyun, a Beijing liquor distributor and part-time real estate speculator, recently found out, levering up bubbly assets just before a crash can have dire consequences on a national scale.

Luo Chuanyun, a 29-year-old liquor distributor, bought his first apartment on Beijing’s northern edge for $150,000 in late 2016, when prices were climbing by more than 20% a year. The purchase put Mr. Luo up to his neck in debt, with mortgage payments of about $15,000 a year on an annual income of a little over $18,000. Mr. Luo said his real-estate agent told him that to find a buyer for his apartment now he would need to sell for half of what he paid. “I’d be short too much money,” Mr. Luo said.

Of course, some of the biggest real estate speculation, and subsequent collapses, have been in new development projects with a litany of 'ghost cities' popping up and subsquently "selling out" even though no one ever actually moves in. As the WSJ notes, in early December, a group of homeowners stormed the sales office of their Shanghai complex, Central Washington, whose developer, Shanghai Zhaoping Real Estate Development, was advertising new apartments at a fraction of the prices of the ones sold earlier in the year. One apartment owner said the new prices suggested the value of the apartment she bought from the developer in March had dropped by about 17.5%.

“There are people who bought multiple homes who are now trying to sell one to pay off the mortgage on another,” said Ran Yunjie, a property agent. One of his clients bought an apartment last year for about $230,000. To find a buyer now, the client would have to drop the price by 60%, according to Mr. Ran.

Not surprisingly, the reason why China is so eager to keep its housing sector inflated - and risk bursting bubbles - is that as shown in the chart below, in 2016 the rise of property prices boosted household wealth in 37 tier 1 and tier 2 cities by RMB24 trillion, almost twice the total local disposable income of RMB12.9 trillion. For any Fed readers out there, that's how you create a wealth effect, fake as it may be.

Meanwhile, according to a fascinating WSJ report from just a few months ago, China's housing downturn is likely far worse than meets the eye, as under Beijing’s direction more than 200 cities across China for the last three years have been buying surplus apartments from property developers and moving in families from condemned city blocks and nearby villages. China’s Housing Ministry, which is behind the purchases, said it plans to continue the program through 2020. The strategy, supported by central-government bank lending, has rescued housing developers and lifted the property market.

So what say you...just another "soft landing" in a series of innocuous Chinese housing bubbles or massive global economic risk lurking in the shadows and largely unnoticed by the world's BTFD'ers?