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For years analysts have warned of a looming real estate bubble in China, but the predicted downturn, the bursting of that bubble, never occurred — that is, until now. In a telling scene two months ago, Shanghai property developers started slashing prices on their latest luxury condos by up to one-third. Crowds of owners who had recently bought apartments at full price converged on sales offices throughout the city, demanding refunds. Some angry investors went on a rampage, breaking windows and smashing showrooms. 

Shanghai homeowners are hardly the only ones getting nervous. Sudden, steep price reductions are upending real estate markets across China. According to the property agency Homelink, new home prices in Beijing dropped 35 percent in November alone. And the free fall may continue for some time. Centaline, another leading property agency, estimates that developers have built up 22 months’ worth of unsold inventory in Beijing and 21 months’ worth in Shanghai. Everyone from local landowners to Chinese speculators and international investors are now worrying that these discounts indicate that “the biggest bubble of the century,” as it was called earlier this year, has just popped, with serious consequences not only for one of the world’s most promising economies — but internationally as well.

What makes the future look particularly bleak is the lack of escape routes. If Chinese investors panic and rush for the exits, they will discover that in a market awash with developer discounts, buyers are very hard to find. The next three months will be a watershed moment for a Chinese investor class that has been flush with cash for years but lacking a place to put it. Instead of developing a more balanced, consumer-based economy, an entire regime of Beijing technocrats — drunk on investment-led growth — let the real estate market run red hot for too long and, when forced to act, lacked the credibility to cool the sector down. That failure threatens to undermine the country’s continued economic rise.

Real estate woes are already sending shockwaves through China’s broader economy. Chinese steel production — driven in large part by construction — is down 15 percent from June, and nearly one-third of Chinese steelmakers are now losing money. Chinese radio reports that half of all real estate agents in the southern city of Shenzhen have closed up shop. According to Centaline, more than 100 local government land auctions failed last month, and land sale revenues in Beijing are down 15 percent this year. Without them, local governments have no way to repay the heavy loans they have taken out to fund ambitious infrastructure projects, or the additional loans they will need to keep driving GDP growth next year.

In a few cities, such as coastal Wenzhou and coal-rich Ordos, the collapse in property prices has sparked a full-blown credit crisis, with reports of ruined businessmen leaping off building rooftops; some are fleeing the country. The central bank’s decision on December 5 to lower the reserve requirement ratio for the first time in three years signaled a broader move to pump money into the economy. Beijing has directed banks in Wenzhou to extend emergency loans to troubled borrowers. Of course, officials could halt the sell-off simply by handing developers enough cheap loans to allow them to carry their inventory. But such a strategy risks re-inflating the bubble.

The impact of a housing downturn would have a significant impact globally. International suppliers who have been fueling China’s construction boom — iron-ore miners in Australia and Brazil, copper miners in Chile, lumber mills in Canada and Russia, and multinational equipment makers such as Caterpillar and Komatsu — could be hard hit. Heavy losses on real estate and related lending could damage investment and consumer confidence, undermining the rising tide of Chinese demand that has been a much-needed growth engine for everything from Boeing airplanes to Volkswagen and GM automobiles to KFC and McDonald’s fast food.

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