Most Australians have become all too aware of how tightly our economic fortunes have become entwined with China, but perhaps we’re still guilty of ignoring some key warning signs from our largest trading partner.

Nowhere is this more apparent than in real estate.

China’s gargantuan property bust has been in the headlines for several years, with some of the world’s biggest developers, notably Evergrande, collapsing under a mountain of debt and unsold and unfinished units.

But, arguably, this property meltdown should have been receiving far more attention Down Under than it has.

As reported by the Wall Street Journal, a Barclays Bank report estimates the cumulative wealth destruction from China’s property price falls so far at $US18 trillion (nearly $29 trillion in Australian currency), or about $US60,000 per Chinese household.

That’s nearly $100,000 — which would be a significant blow even for most Australian households, which are multiple times wealthier than their average Chinese counterparts.

It’s also bigger than the direct loss of wealth to US households from the property bust there that sparked the global financial crisis of 2008.

And it’s not over yet, with prices still trending lower in most cities.

While developers, plagued by years of falling new home sales, have about three years’ worth of apartments waiting for a buyer and that much again in land holdings awaiting development.

To put a number on it, there could be as many as 80 million vacant units in China — that’s more than seven times the total number of homes currently standing in Australia.

Harvard professor and former IMF chief economist Kenneth Rogoff and his co-author Yuanchen Yang of the IMF, argue that China has built more living space per person than many wealthier Western nations, even though much of it sits empty.

But it isn’t just homes that China has overbuilt, with many gigantic infrastructure projects also under-utilised.

Combined, Rogoff and Yang estimate that construction accounted for about 31 per cent of China’s economic output in 2021 — just ahead of the property bust — more than 50 per cent greater than construction’s share of US GDP, and similar to the levels in Spain and Ireland before their property meltdowns.

With a working-age population already in decline, it is hard to see how this massive oversupply of homes can be absorbed without a substantial shrinkage of the construction and broader real estate sector.

In a 2020 paper, Rogoff and Yang calculated that “a 20 per cent fall in the size of China’s real estate sector would lead to a 5–10 per cent fall in output, cumulatively over a number of years, even absent a financial crisis”.

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‘Plenty of pain still to be felt’

China’s property mistakes are particularly bad news for Australia, with apartment construction a major consumer of steel — a product for which Australia is a key supplier of the two key raw ingredients, iron ore and coking coal.

Iron ore prices are now back under $US100 a tonne, eating into national income and the nation’s tax take, helping to push the federal budget back into deficit.

The Australian dollar has also been a casualty, falling below 62 US cents, to levels not seen outside of crisis periods since the early 2000s.

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Leading independent Australian economist Chris Richardson is scathing of China’s property excesses.

He warns Australians that they should be paying far more attention to the north, rather than across the Pacific at what Donald Trump will do in the US.

While a fresh round of aggressive tariffs would exacerbate China’s economic malaise, Richardson says the problems are fundamentally homegrown.

“The demographic swing has been remarkable — China is ageing fast. Its birthrate has collapsed, while the number of those aged 65+ will reach 300 million this year,” he wrote on X.

“Those low birthrates are self-inflicted. Who can afford to house a baby in a nation where ‘home-price-to-income ratios in Beijing, Shenzhen, and Shanghai had reached levels nearly double those of London and Singapore, and three times those of Tokyo and New York,'” he added, quoting figures from the recent report by Rogoff and Yang.

Is Australia that different?

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But, aside from its direct effects on some of Australia’s key exports, China’s property downturn should perhaps prompt us to reflect again on our own property crisis.

As with China, Australian property prices have skyrocketed since the early 1990s.

As with China, the home price-to-income ratio and deposit hurdle in major cities are now prohibitive for all prospective buyers but extremely high-income earners or those with backing from family wealth.

As with China, Australian household debts have ballooned. In fact, our household debt-to-GDP ratio is about double theirs. Government debt, however, is far, far lower.

As with China, Australians are having fewer children later, with housing costs a major contributing factor to declining birth rates.

At the moment, the key difference, and it’s an important one, is that ours is still a crisis of rising prices not falling ones (although there are early signs this is shifting), and a problem of housing undersupply rather than oversupply.

But, in other respects, are we that different from the Chinese? Or the Americans, Irish, Spanish or Japanese property crashes before them?

The main reason Australia has an undersupply of homes relative to China’s oversupply is that our population is still growing strongly, thanks to migration, while China’s is not.

As we found out during COVID, if that flow of people gets turned off, it doesn’t take long for the supply and demand equation to shift quite dramatically.

In that case, it took extreme monetary and fiscal stimulus to transform widespread forecasts of 10 to 30 per cent house price falls into yet another real estate boom.

But all the ingredients are there for a potential housing crash if that happens again and, for whatever reasons, the Reserve Bank and federal government can’t step in again so aggressively.

And there’s a risk that China’s property crash — by denting national income, economic growth, the federal budget and the Aussie dollar — could create the very conditions to precipitate our own.