China's cooling property market poses key downside to economic growth

China's cooling property market poses key downside to economic growth

China's cooling property market poses key downside to economic growth

China's property market could threaten Beijing's plan to manage a slowdown in growth, as evidence mounts of a rapid cooling in what had been one of the few strong spots in the world's second largest economy.

So far, the economic story is going to script, with growth of 7.4 per cent in the first quarter from a year ago.

While the slowest pace in 18 months, it was just ahead of market expectations and seemed to soothe fears of a sharp downturn.

But marked decelerations in property investment and sales, and a contraction in housing starts in the first quarter, point to weakness in a sector that supports some 40 other industries, ranging from cement to furniture, and plays an important role in underpinning consumer confidence.

"We think weaker property activity poses a key downside risk to GDP growth this year," Tao Wang, economist at UBS said in a note to clients.

Home price data on Friday is expected to show a further moderation in March after gains fell to a six-month low in February.

Property investment generated about 12 per cent of China's GDP in the first quarter, down from a 15 per cent contribution in 2013, Reuters calculations based on official figures showed.

The sector has lost steam since late 2013 as authorities tightened controls on speculative buying, and as banks made it harder for home buyers and small developers to get loans.

Media have reported developers cutting home prices in eastern cities of Hangzhou and Changzhou and the western city of Chengdu, and some developers missing loan repayments.

"We cannot continue to count on fast growth in the property industry to bring in strong sales of furniture and big revenues from land sales," said Lv Fengyong, a researcher at the Chinese Academy of Social Sciences (CASS), a government think-tank.

Annual growth in property investment slowed to 16.8 per cent in the first three months of the year from 19.3 per cent in the first two months, pulling total investment down to a level not seen since December 2002, official data show.

Newly started construction dropped 25.2 per cent in the first quarter from a year ago.

And figures from the land ministry show residential land price gains slowed for the first time in nearly two years in the first quarter, and likely to slow further.

"The 20 per cent annual property investment growth seen in the previous year will not appear again," said Lv at CASS.

"We expect that most developers will accelerate their sales in the next couple of months and that price-cutting looks inevitable to mitigate the impact of rising mortgage costs," Alvin Wong, a property analyst at Barclays, said in a note.
Necessary correction?

Not all are bearish on property, citing the government's urbanisation policy and the fact that most Chinese still view property as one of the best investment options.

Further, any threat to state revenues from a slowdown could prompt some support. Land sales are a major source of income for local governments, which have combined public debt of some $3 trillion, equivalent to about one-third of GDP.

"Local governments are likely to loosen property controls quietly in the next move on concerns over their much-need land sales revenues," said Shen Lan, an economist at Standard Chartered in Beijing.

Chen Guoqiang, vice-chairman of China Real Estate Society, said the market was, like the broader economy, simply adjusting to a more sustainable pace after years of red-hot growth.