How Quickly is the Chinese Property Market Correcting?

Nicholas Borst (Federal Reserve Bank of San Francisco)



Fighting bubbles in an economy as big as China’s requires both patience and skillful management of public expectations.

Recall that it was December 2009 that China’s economic planners first began efforts to tame the property market by raising the required down payment on investment properties to 40%. That it took almost two years and a spate of additional credit-tightening policies before a significant slowdown took hold is a testament to resilience of the property market.

Property prices in China’s major cities finally appear to be cooling. The median price for a new home in 70 Chinese cities has been flat over the past several months, although prices are still up compared to last year.

When a market reaches a turning point, month-on-month data may be more telling than yearly changes. Looking at monthly changes, its clear that prices in several of China’s most important cities have stayed flat or even declined.

A similar story is told when looking at the residential real estate investment figures. Investment peaked at over 38% year-on-year growth in April and has cooled modestly since then.

Reports that property developers are have slowed home construction and are cutting prices to clear inventory seem to be borne out by the data. The trend is less obvious, but it does appear that the pace of new starts has slowed and sales are up.

Even though a genuine slowdown appears to be underway, the government continues to play a shrewd game in managing expectations. Premier Wen recently declared “there will not be the slightest wavering in China’s property-tightening measures,” dousing  widespread hopes that government may ease up on credit tightening soon. Wen’s statement indicates that the government is trying to dampen expectations that the property market will soon spring back to its white hot growth of earlier in the year.

The tightening polices of the past two years have caused the real estate industry to groan and cry for mercy, but Chinese policymakers wisely are not ready to declare mission accomplished. As long as the dynamics of financial repression are in place (low interest rates on deposits, closed capital account, lack of alternative investments) the property bubble remains in danger of reinflating. Absent significant financial sector reform, the Chinese government will have to remain vigilant in suppressing a property bubble that is almost the inevitable result of a distorted financial system.

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