China’s property boom, which has for years been a source of worry among global investors that have seen other brick-and-mortar bubbles go pop, is largely over now, according to Credit Suisse.

China’s property boom, which has for years been a source of worry among global investors that have seen other brick-and-mortar bubbles go pop, is largely over now, according to the wealth management and private arm of Credit Suisse.

In a note entitled Implications of Slowdown In China’s Property Market, analysts at the Swiss bank say Asia’s second largest economy is at the start of a “multi-month property slowdown”. As property market declines have been associated with economic downturns in other geographies, this will raise alarm bells.

There are some causes for comfort, however, the bank says. Household leverage is relatively low; urbanisation continues and Chinese have a strong desire to buy and hold property. “Chinese households are thus less likely to sell under financial stress when property prices slide,” the bank said.

“Nevertheless, a cyclical downturn is still likely to materialise, in our view, with the speed and extent of the slide dependent on the swiftness and willingness of authorities to respond with policy easing,” it continued.

The stakes are considerable. There have been worries in China and abroad that the country’s banking system, with its links and exposures to real estate, is vulnerable. Goldman Sachs told this publication a few months ago, for example, that there is a high probability in the next few years of a financial sector crash on a par with the kind of financial turmoil seen in Asia in the late 1990s, or in Latin America in the 1980s, or more recently, in Europe and the US. The firm pointed out that in nearly all cases where a country tries to shift from being an export-driven economy to a more balanced, domestically-orientated one, financial strains are inevitable, and painful in the short term.

The speed and scope of a slide in property markets in China will depend on how far and fast Chinese monetary and other authorities react; policy changes will vary between local authorities in the country, Credit Suisse said.

Property accounts for about 26 per cent of all fixed asset investment, so any serious downturn will hit the economy; manufacturing, by comparison, accounts for around 10 per cent of FAI (data as of 2013). Real estate is also an important driver of government revenue, so a slowdown in land sales and development will hit budgets.

Data
The bank notes a “striking” fall in property activity. According to the National Bureau of Statistics, residential floor space sold has fallen at a 5.7 per cent year-on-year rate in the January-March period this year; that contrasts with a 17.5 per cent rise for the whole of 2013.

Data from other sources, such as property agency Centaline Group, also points to weakness into this month [May], with a sharp fall in property sales.

At a national level, meanwhile, there hasn’t yet been a fall in average property prices, but the pace of price rises is clearly slowing down, the bank said.

The bank said there are signs of an excess of supply versus demand for property; academic studies suggest property prices are significantly overvalued compared to fundamental drivers such as population growth and monetary conditions, and the central government is deliberately curbing credit growth following a big buildup in leverage in the aftermath of the 2008 financial crisis. Finally, Chinese are getting older, on average, as low birthrates take their effect – this will hit housing demand.