What China’s Cooling Housing Market Means for Its Economy

August 18, 2016, 7:21 AM UTC
A large area of new apartment blocks have been built around
LUOYANG, HENAN, CHINA - 2014/09/30: A large area of new apartment blocks have been built around the Luoyang Longmen High Speed Railway Station, which was once rural farmland. According to the housing index issued in Sept, the average price of a new residential in China has continuously decreased for the fifth straight month. Many middle sized cities have cancelled the limit policy and the government is considering modifying the mortgage lending measures for first-home buyers to stimulate the market. (Photo by Zhang Peng/LightRocket via Getty Images)
Photograph by Zhang Peng/ LightRocket via Getty Images

Home price rises in China‘s biggest cities showed signs of easing in July, adding to concerns that one of the economy’s key growth drivers is losing steam but offering some relief for policymakers worried about property bubbles.

A robust recovery in home prices and sales gave a stronger-than-expected boost to the world’s second-largest economy in the first half of the year, partly offsetting weak exports.

But some analysts say slowing price growth and weakening property investment suggest the rebound may have peaked, as more local governments tighten restrictions on home purchases in a bid to keep fast-rising prices in check.

“We believe the housing market is cooling down from the rebound in the first half. Property investment will continue to drop, which will put more pressure on the economy in the future,” said Hua Chang Chun, an economist at Nomura.

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Average new home prices in China‘s 70 major cities rose 7.9% in July from a year earlier, an official survey showed on Thursday, compared with a 7.3% increase in June.

But on a monthly basis, prices rose just 0.8% in July, the same pace as in June, which was the slowest since April, according to a Reuters calculation based on data issued by the National Bureau of Statistics (NBS).

Prices also stalled or fell in more cities than in June.

Some of China‘s largest cities continued to see eye-popping annual gains, with southern boomtown Shenzhen rising the most by 40.9%, but monthly increases have moderated.

Prices rose 20.7% and 27.3% on-year in Beijing and Shanghai, but were up just 1.5% and 2% from June.

The market also remains uneven, with some smaller cities in hard-hit industrial regions such as “rustbelt” Liaoning province continuing to see price declines. In many of those areas, local governments are still trying to stimulate demand.

“Our land was bought at reasonable prices, and we will speed up new launches going forward. Land prices are at high levels now, but government is generally still supportive to the sector,” Shao Mingxiao, CEO of Longfor Properties, said at a company earnings conference on Wednesday.

See also: Why Chinese Investment in Overseas Real Estate Has More Than Doubled


China‘s ailing property market began to recover late last year thanks to a series of interest rate cuts and stimulus measures. Last summer’s stock market crash has also left yield-hungry Chinese investors with few other options.

But prices and sales have started to cool as China‘s biggest cities impose curbs on home purchases, and as smaller cities struggle to clear large inventories of unsold homes.

For July, property investment growth dropped to 1.4% from a year earlier, according to Reuters calculations, compared with 3.5% growth in June.

State-run newspapers, meanwhile, have been publishing a flurry of stories and commentaries on housing bubbles.

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The Securities Times on Tuesday warned of the risks to the banking sector and the economy of being overly reliant on the property market, noting that household loans, which are mainly mortgages, made up over 90% of new loans in July.

Growth in China‘s money supply and credit also is slowing, potentially taking more wind out of the housing market’s sails, according to a BofA Merrill Lynch Global Research report, titled “The best days are likely over for China‘s housing market.”

UK-based Fathom Consulting believes repeated interventions by the government have prevented China‘s property markets from clearing massive inventories, and said policymakers are continuing to inflate the housing bubble.

“With development focused primarily on those regions already suffering from excess capacity, China is playing a dangerous game,” the consulting firm said in a report last week.