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Cooling property market could affect China's growth

China's property sector showed further signs of cooling for the month of April -- average prices of new homes in 70 major cities rose 6.7 per cent on-year, down from 7.7 per cent a month earlier. Some economists said that the real estate downturn could be the main drag on China's growth this year.

SHANGHAI: China's property sector showed further signs of cooling for the month of April -- average prices of new homes in 70 major cities rose 6.7 per cent on-year, down from 7.7 per cent a month earlier.

Some economists said that the real estate downturn could be the main drag on China's growth this year.

After years of red-hot growth, China's property market is cooling down but the slowdown is spilling over to other sectors -- steel and cement production is down nearly nine per cent while land sales fell 20 per cent, cutting into government revenue.

Oliver Barron, head of research at North Square Blue Oak's Beijing office, said: "The key issue is that there's too much supply and demand is constrained. Reducing purchasing restrictions and reducing barriers to entry will hopefully get some demand in.

"What happens if they reduce the purchase restrictions and people don't start buying -- then you're stuck with oversupply and no way to stimulate the market. Similarly, if they start buying, developers start building in these same places, you do risk building bubbles and making the bubble worse."

The stockpile of new unsold homes in 35 Chinese cities has risen to its highest level in five years. Developers have resorted to slashing prices to reduce inventory in a bid to turnover capital as banks tighten loans on the property sector.

Johnny Sze, managing director at Hanyu Properties, said: "Tight credit affects not just the individuals. We're seeing many developers lose funding under this situation, including Guangzhou's Guangyao Properties which is going bankrupt, and there's another in Hunan which is asking for government bailout.

"We've seen it spread from third-tier cities to second-tier ones. Will it hit first-tier cities or even see credit problems for bigger developers? If so, could it expose the financial problems in the property sector which has always been regarded as unbreakable?"

Problems that could potentially unravel China's banking system, estimated to hold US$2.5 trillion of mortgages and loans to developers, on top of US$1 trillion of shadow bank credit.

Some analysts also said that there are other factors which could act as buffers to prevent a hard landing for China's property sector -- like high down-payment ratio for mortgages and rising land prices in first-tier cities.

In the meantime however, the sector will see some painful correction -- an inevitable result of years of red-hot growth and easy credit. 

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