Source: Flickr user Kool Cats Photography.

Turn to the front page of any newspaper or financial business journal, and you're likely to find one of two topics: the rift between the White House and the new Republican-led Congress or the dramatic drop in oil prices since last summer.

Oil takes center stage
The hoopla over oil prices makes sense to some extent. We've never witnessed this drastic of a plunge in oil while the U.S. economy was growing so robustly (5% GDP growth in Q3). Prices are down more than 55% since peaking at nearly $110 per barrel (for West Texas Intermediate), causing some investors to worry about the long-term survival of newer players in U.S. shale. Meanwhile, Americans are savings billions of dollars in gas compared to six months ago, and the expectation is (since we're such poor savers) that this money will end up being pumped right back into the economy, helping to offset what job losses and capital expenditure declines we witness in the energy sector.

The fall in oil prices also has implications for a handful of other countries outside our borders. Russia and Venezuela are good examples, as their economies are intricately tied to the success of oil exports.

All that said, people are focusing so narrowly on oil that they're missing what could be the bursting of the greatest real-estate bubble in history.

Source: Flickr user See-ming Lee.

Something's amiss in China
Earlier this week, economic powerhouse China reported that its fourth-quarter GDP growth slowed to 7.3% and that its full-year 2014 GDP growth dipped to 7.4%. While these would be stellar growth figures for most countries, that's the slowest full-year GDP growth rate for China since 1990.

To some extent, slower growth has been expected. President Xi Jinping has been emphasizing quality over quantity when it comes to future earnings growth. For example, earlier this week China attempted to crack down on rampant stock-market speculation by imposing margin-trading curbs on three of the nation's major brokerages.

Still, this hasn't stopped China's government from stepping in and shoring up growth in other areas of the economy. China propped up its solar industry in 2013, pledging 35 GW of orders through 2015 when the prospect of tariffs in EU markets made China's solar export prospects look bleak. Additionally, China is on track to launch what could be a stimulus package worth more than $1 trillion over the next two years that will entail some 300 infrastructure projects designed to boost high-quality GDP growth.  

But the government's efforts to support what's becoming a volatile and unpredictable economy may all be for naught, because we could be witnessing the collapse of the greatest real estate bubble ever within the country.

Downtown Shanghai, China. Source: Flickr user Jakob Montrasio.

Will this be the biggest bubble burst in history?
Based on estimates from economists, as reported by The Wall Street Journal in June, China nets anywhere from 16% to 25% of its GDP from real estate investments and real-estate-related services, such as construction.

By comparison, the National Association of Home Builders in the U.S. estimates that residential investment contributes about 5% to U.S. GDP, while housing services add another 12% to 13%. Altogether, housing and related services comprise 17%-18% of U.S. GDP. I'm sure the memory of the U.S. housing collapse is still fresh in many Americans' minds, and it's possible that China's could be even bigger.

A study conducted this past summer by the Survey and Research Center for China Household Finance discovered that the vacancy rate of homes in urban areas of China had hit 22.4%, or 49 million homes. Furthermore, an additional 3.5 million homes still sit on the market unsold on top of these 49 million empty homes. A survey that piggybacked on this data by China's Southwestern University of Finance and Economics noted that outstanding mortgage loans on these properties reached close to $675 billion as of Aug. 2013 and that a 30% fall in home prices would lead one in nine of these properties to be underwater (i.e., to have a value that's lower than the amount owed). 

So long as investments in real estate are steady and property prices remain stable or rise, most people have been willing to overlook this risk. However, data from the National Bureau of Statistics of China paints a very different picture.

A picture is worth a thousand words
Just this past week the NBSC released sale price data on newly built commercial residential buildings in 70 medium- and large-sized cities in China in December 2014. The data showed that commercial residential building prices declined in 66 of 70 cities, were unchanged in three cities, and rose in just one city. In November, 68 cities demonstrated a month-over-month price decline.

This same report also included data on secondhand residential buildings. In this niche, prices declined in 60 of 70 cities from the previous month, which was a modest improvement from the 67 cities that registered a month-over-month decline in November 2014.

But this data only scratches the surface. The following three charts from from the NBSC's November 2014 report on real estate development and sales are much more telling.

First we have a 10-month decline in the growth rate of investment in real estate development:

Source: National Bureau of Statistics of China.

Next up, we have declining year-over-year land purchases by real estate development companies:

Source: National Bureau of Statistics of China.

And finally, we have a year-over-year collapse in the number of commercial buildings being sold: 

Source: National Bureau of Statistics of China.

What only further adds to the concern from these charts is that some real estate developers haven't been abiding by Chinese law when it comes to required down payments. Regulations in China require a homebuyer to put 30% down before purchasing a home, but desperate developers in some provinces have waived this clause in order to continue selling homes. The result could be a mortgage default that dwarfs what we witnessed in the United States, as buyers are jumping into homes with potentially no money down.

Why this matters
You might be wondering why all of this even matters. I'd suggest that a collapse of China's housing bubble could cripple global growth and affect significantly more countries than a further 50% drop in the price of oil. China is a major exporter and importer of goods, making it arguably the most important economy in the world. A dramatic slowdown in its growth could plunge a number of developed and emerging markets into a recession.

Therefore I'd suggest you focus less on oil these days and more on China's housing market and what the government plans to do to ensure the entire industry doesn't collapse under the weight of vacancies and unpaid mortgages.