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Choppy waters for the property sector.

The slump in China's property market looks to be accelerating with new home prices last month falling at the fastest pace on record. The sector is emblematic of problems such as rapid credit expansion and policies that promote short term growth over a more balanced economy.



House prices in the major cities surveyed by the National Bureau of Statistics, fell on average by 5.7 per cent compared to February last year. It's the sixth consecutive month house prices have fallen, including drops of 5.1 per cent in the year to January and 4.3 per cent in December. Only one city of the 70 surveyed saw any increase in house prices. Representing between 20-25% of the economy, the government however, still believes that the increased pace of urbanization will stabablize the declines this year: however, perhaps, China has simply built too much? Provincial governments meanwhile, will have to be persuaded to reduce their dependency  on their sales of state owned lands to the developers: which will be no easy task since some estimates put this at around 40% of their annual revenue. 



A further concern is the effect on property developers (still supplying over 15m housing units a year), who will be caught in a situation of tight cash flow, which is bound to churn up the shadow banking sector in China: the sector is largely built on implicit guarantees and any meaningful defaults there may jeopardize the stability of the financial system. When developers are limited access to credit, they have to reduce prices to unload their unsold housing units (and pay back their debts), which gives investors second thoughts about whether to continue plowing their money into property, starting a deflationary spiral. Falling asset prices undercut the basis for both past and future lending.



However a saving grace is that Chinese households continue to have a relatively low level of household debt, due to large mortgage down payments (China buys in cash, in full). 


2015 is likely to be a choppy period for China, as we see the realities of President Xi Jinping's "New Normal".




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