SHANGHAI — American homeowners wondering what follows a housing bubble can look to China's largest city.
Once one of the hottest markets in the world, sales of homes have virtually halted in some areas of Shanghai, prompting developers to slash prices and real estate brokerages to shutter thousands of offices.
For the first time, homeowners here are learning what it means to have an upside-down mortgage -- when the value of a home falls below the amount of debt on the property. Recent home buyers are suing to get their money back. Banks are fretting about a wave of default loans.
"The entire industry is scaling back," said Mu Wijie, a regional manager at Century 21 China, who estimated that 3,000 brokerage offices had closed since spring. Real estate agents, whose phones wouldn't stop ringing a year ago, say their incomes have plunged by two-thirds.
Shanghai's housing slump is only going to worsen and imperil a significant part of the Chinese economy, says Andy Xie, Morgan Stanley's chief Asia economist in Hong Kong.
Although the city's 20 million residents represent less than 2% of China's population of 1.3 billion, Xie says, Shanghai accounts for an astounding 20% of the country's property value. About 1 million homes in Shanghai alone -- about half the number of housing starts for the entire United States in 2004 -- are under construction.
"They'll remain empty for years," Xie said, adding that a jolting comedown also was in store for other Chinese cities with building booms -- including Beijing, Chongqing and Chengdu -- though other analysts say the problem is largely confined to Shanghai.
Shanghai's housing bust comes after a doubling of prices in the previous three years, a run-up fueled by massive speculation. With China's economy booming and Shanghai at the center of worldwide attention, investors from Hong Kong, Taiwan and elsewhere were buying as fast as buildings were going up. At least 30% to 40% of homes sold were bought by speculators, says Zhang Zhijie, a real estate analyst at Soufun.com Academy, a research group in Shanghai.
"Ordinary people had no option but to follow the trend," Zhang said. "Worrying that prices would be even more unaffordable tomorrow, many of them borrowed from relatives and banks to buy as soon as possible."
The Shanghai government only pushed the market higher, he added. "Many of the officials said Shanghai's property market was healthy and wouldn't drop before the World Expo" in 2010.
For Wang Suxian, the tale of two lines illustrates how the bubble has burst.
When home prices were at the tail end of the boom in March, Wang hired two migrant workers to stand in line for a chance to buy units in what the developer said was modeled after an apartment community on New York's Park Avenue.
The workers waited 72 hours, including cold nights, but the 35-year-old was thrilled to come away with two apartments, one for $110,000, about the average price for a new home in Shanghai, and another for $170,000. They were among Wang's four investment properties.
And for a short period, Wang believed she was raking in hundreds of dollars a day for doing nothing, as property prices in the city kept soaring.
But today, prices at the complex have fallen by a third, and the lines of frenzied buyers are gone. Wang is among dozens who are fighting the developer to take the apartments back.
On a recent frosty morning, she stood in a line herself with about 40 other buyers outside the builder's headquarters, demanding that it negotiate a deal to return their money. "This is ridiculous," Wang huffed.
The company, Da Hua Group, invited Wang and other homeowners inside, served them hot tea, then told them to forget it.
"I think it'll take at least three years before the property market becomes healthy again," said Zhu Delin, a finance professor at Shanghai University and former head of the Shanghai Banking Assn.
The typical home being built is in a high-rise complex, with two bedrooms and about 850 square feet of living space.
Developers say many of Shanghai's homes are valued at about $70,000 or less, and price drops haven't been as steep for those units.
Some still see promise in the Shanghai market. Incomes are rising and droves of people are relocating from the inner city to outlying areas, said Richard David, managing director at Macquarie Property Investment Banking China in Shanghai.
What's more, he says, the Shanghai government -- which owns all the land -- has auctioned off few lots in the last two years, which will limit the number of housing units in the future.
But that's little solace for homeowners who have seen inventories rise even as buyers show no hurry to come back into the market.
In Shanghai, people blame the popping of the housing bubble on the central government, which has applied one measure after another in the last year to quash excessive speculation and price increases.