The 5 Stages of the Chinese Real Estate Bubble?

FEATURE-Social, economic dilemma for China as home prices soar

1. The Bubble Is Desirable

Analysts say, however, that the government may not be able to rein in the property sector too aggressively since it is a main pillar of the economy with its investments accounting for over 10 percent of gross domestic product.

Real estate was a main pillar of America too. The government sure wanted everyone to own homes.

2. The Bubble Is Fueled

Due to a lack of other investment options and as real bank deposit rates turn negative, more of China's accumulated wealth and savings are likely to pour into real estate in many top cities, potentially exacerbating inflation and home prices for the grassroots.

The real interest rate on the 5-Year TIPS was roughly 1% when I turned bearish in 2004. It's even lower now. Our housing market still crashed though.

3. The Bubble Becomes a "Sure Thing"

"But if we have any surplus money, we'll invest it in another flat," added Zhou, who runs a printed circuit board factory with her husband in Songgang, a gritty town in Shenzhen's western suburbs. "We'll wait till after the lunar new year ... After that I think the market will rise again in the long term for sure."

Most were fairly convinced that real estate could never fall here either. That list would even include Ben Bernanke. At the very peak of the market he claimed that there was no housing bubble to go bust.

4. The Bubble Can No Longer Expand

"You will find that the ratio (in China) is very, very high. (It's) very unaffordable because a lot of cities -- we're talking about 60 percent to 70 percent of their monthly household income -- needs to be used for monthly mortgages," said Wee Liat Lee, an analyst at Nomura International.

100 percent is pretty much the theoretical maximum. I would also argue that the 100 percent ceiling has probably never been tested on this planet. Ever.

5. The Bubble Eventually Pops

"The central government is trying to get the price down for a short period of time. They're squeezing out the people with money to allow the middle class to be able to afford (property) again," said Andy Xie, an independent China economist.

In my opinion, someone in the Chinese government finally realizes that they've gone too far. It's all damage control from here on out.

These are just my opinions of course. Those betting heavily on the "sure thing" global inflation story and/or the Chinese economic miracle story better hope that I am wrong.