China’s Property Slowdown. So What?

Okay, China’s property market is slowing down. The picture does not look very good as prices are declining. So what? Here is why you should say the same thing. “So what?”

Bottom line, there are signs of oomph. In other words there are signs of strength in China’s housing market. We see impending demand and tools policy makers at the People’s Bank of China (PBOC) and Beijing have yet to deploy. In other words there is a lot Beijing can still do to support the housing market.

This bubble stems more from the supply side. In other words from overbuilding. More so than from a demand side, where home prices, have moved higher to a point that they cannot be deemed affordable.  What does this mean? There is still something to be done to stimulate demand if Beijing wants to go that route. There are rising income levels and continued population shifts to the urban areas which will make the pool of potential buyers larger as time goes on. Policymakers know the risks and can enact measures, with a broad basket of tools, to smooth adjustment as well as limit potential risks.

Last September, Beijing took steps to support the housing market. They are allowing lower mortgage down payments so more can afford to buy their first home. There is even more room left to lower them even further. The mortgage debt to gross domestic product (GDP) ratio is very low in China. Lowering mortgage credit further would stimulate demand and sales. It will also support new construction with little financial risk to GDP stability.

Another thing Beijing can do is to provide capital to distressed developers. They can even purchase inventory from them directly. This will keep the developers from slashing prices to move inventory faster.

Still, policymakers in Beijing admit managing this slowdown is not as easy as it looks. Beijing must be selective, if not restrictive, to bring in the shadow banking system. They must limit future excesses in construction as well. However, their policy must be loose enough to support demand for housing. They must avoid a sharp credit crunch which could stem from a sharp narrowing of existing housing inventory which will then lead to large declines in prices.

When we look at the last two housing slowdowns China has experienced, the first from 2008 to 2009 then the most recent one that started in 2011 and ended in 2012, debt is now higher and growth is now slower. This means Beijing must show more constraint today as they enact and implement new policy tools to support the housing market. They want to avoid a hard landing.