The International Monetary Fund is concerned about empty real estate developments in China's second and third tier cities.
Betting on the continued housing boom, developers and lenders have been devoting enormous amounts of money into real estate. The problem is, people aren't moving into it.
The oversupply problem in second and third tier cities is so bad, the IMF said it could likely derail China's economy buy a whole percentage point, according to Forbes.
In the year 2000, real estate accounted for around 5% of China's GDP. By 2012 it rose three times to 15 percent, according to the IMF's calculations. It certainly did not decline in 2013 and 2014, despite Beijing working overtime in forcing a market correction. The IMF did not have data for the last two years.
The real estate market appears to be undergoing a correction. While a slowing of investment and construction by as much as 10% would definitely reduce growth from 7.5 percent to 6.5 percent, an orderly adjustment is still factored into the IMF's baseline scenario.
Unlike the real estate bubble in 2008 that derailed the U.S. economy, there is no subprime or foreclosure crisis looming in China.
The problem is urbanization has not happened as fast as expected and as developments sit empty. As a result, owners could struggle to pay back lenders.
Chinese real estate has many upstream and downstream effects on industries as well, including cement and steel makers, to heavy equipment leasing companies.
"A mantra for China developers and their lenders is in order," wrote Kenneth Rapoza, a contributor to Forbes. "It may not ring is nicely, but surely will ring true: if you build it, they might not come."
The market is slowing, but the errors might have already been made and the consequences could be looming.
As of May, average residential price growth started to turn slightly negative. Transactions fell by 10 percent and housing starts fell 12 percent, according to Forbes.
Real growth in investment fell, too, from a 20 percent growth rate in 2012 and 2013 to around 10 percent by May 2014.
