The giant Chinese real estate bubble has reached dire proportions and everything seems to indicate that the authorities of the Chinese Communist Party (CCP) have no intention of deflating it. But what would happen if it were just to burst?

In a July 16 article in The Wall Street Journal (WSJ), journalists Stella Yifan Xie and Mike Bird explain why the bubble continues to grow despite the slowdown in China’s economy and the crisis triggered by the pandemic.

With the capital account virtually closed, the CCP is not letting financial investments in or out, which ended up making the banking sector swell to nearly $40 trillion by July 2020.

Much of that money is going into the real estate market as a form of investment, even for the middle class.

The numbers speak for themselves: while in the United States most of a household’s net worth is in financial assets (less than 30% goes into real estate), in China the opposite is true, and about three-quarters of all household wealth is invested in housing.

Thus, fuelled by loans and subsidies, the Chinese housing bubble continues to grow, creating an illusion of “wealth effect” among several hundred million middle-class Chinese.

According to Xie and Bird, the Asian giant’s housing market is perhaps the largest bubble in the world. At the peak of the U.S. housing boom that led to the 2008 crisis, some $900 billion was invested annually in residential real estate. In the 12 months ending in June, about $1.4 trillion was invested in housing in China.

In this regard, according to Goldman Sachs, the total value of homes in China in 2019 climbed to a staggering $52 trillion, twice the size of the U.S. residential market.

House prices in some Chinese cities have reached levels comparable to some of the world’s most expensive urban areas. In Tianjin, a city of 15 million southeast of Beijing, apartments in luxury areas sell for about $9,000 per square meter, or about $836 per square foot, according to the real estate services company Savills PLC. That is roughly the price an average buyer would pay in some of the most expensive parts of London, although disposable income is seven times higher in London than in Tianjin.

But the most striking thing is that the CCP apparently has no intention of deflating prices, fearing a wave of bankruptcies, payment cuts, and unpredictable social (and political) consequences. This has meant that the bubble has continued to grow even during the pandemic: according to data provided by WSJ. June 2020 was the month with the highest investment in real estate in the history of China.

The Chinese are aware of the situation, but cannot find other alternatives either. As described by Zhao Wenhao, an agent at Lianjia, one of China’s largest real estate brokerage firms, many of its clients are concerned that the Chinese currency will depreciate, causing them to allocate their money to the housing market as a safe haven.

That’s why the bubble continues to grow: Chinese urban housing prices rose by 4.9% and investment in the sector has increased by 1.9% so far this year.

According to the WSJ, beyond the fact that General Secretary of the Communist Party Xi Jinping once said, “Housing is for living and not for speculation.” The words have remained empty and the authorities of the CCP have not shown any intention of trying to stop this price escalation.

Meanwhile, the bubble continues to roll on an ever larger scale: while sales are up, driven by debt, the price of houses also continues to rise. The problem, as with any bubble, lies in the leverage rate, which for Chinese households reached a record high of 57.7% in the first quarter of 2020.

“The central problem in China is that buyers have figured out the government doesn’t appear to be willing to let the market fall,” said journalists Xie and Bird.

“If home prices did drop significantly, it would wipe out most citizens’ primary source of wealth and potentially trigger unrest,” they explained.

Such an attitude by the authorities gives an incentive to middle-class Chinese citizens to keep buying because they believe that property in big cities will remain the safest investment in China.

“Property has hijacked China’s economy, so the government wouldn’t dare push for a plunge in housing prices, even if that’s the most effective way to deflate the bubble,” Chen Zhiyu, who works for an American retailer and is looking to buy a property in Shenzhen, told the WSJ.

While this is Chen’s view, the truth is that as the bubble gets bigger, an increasing portion of the economy depends on the continued expansion of the housing bubble, which ends up making more and more sectors interested in keeping the bubble from bursting. Property sales, for example, are driven not only by real estate companies but also by local governments that sell them land and collect income and property taxes.

In fact, income from land sales and taxes related to property developers accounted for 52.9% of local government revenues in 2019, a record, according to the Shanghai Yiju Institute of Real Estate Research.

The pandemic has only made the situation worse: Surveys by the China Household Finance Survey, based at the Southwest University of Finance and Economics in Chengdu, suggest that the CCP Virus pandemic has encouraged the type of buying that the CCP is concerned about, with demand for property increasing among those who already own multiple properties but decreasing among those who do not yet own any.

This is a telltale sign of speculative investment, according to Gan Li, a professor of economics at Texas A&M University and an expert on Chinese domestic finance.

Because of the pandemic they’re actually consuming less, and saving more. So they’ll actually have more money available to invest. That will create an even larger housing problem,” Li said in a dialogue with WSJ.

There are other problems too, one is that instead of living in the properties, many Chinese are using local apartments as nothing more than an investment asset. By the end of 2018, more than 50 million apartments were empty in Beijing, about 21% of all houses in urban China.

Since then the number has only increased, and according to the WSJ citing recent data from the China Household Finance Survey, there are now 65 million empty units.

Needless to say, Chinese families are over-indebted on mortgage loans. Globally, China accounted for about 57% of the $11.6 trillion increase in household lending over the decade to 2019, according to the Bank for International Settlements.

The problem is that at some point the bubble will burst, and depending on the expansion of the burst, it could even mean a civil uprising, as hundreds of millions of people realize that their wealth is really only paper.

But in the meantime, the wheel will keep turning as long as there is a “bigger fool” willing to buy the next marginal unit at an even higher price. Until someone says “enough” and the inevitable is unleashed.