China’s cooling property market ‘a challenge’ to growth objectives

The cooling property market in China could threaten the country's growth targets, the Reserve Bank of Australia (RBA) said today – a view shared by two economists at the Federal Reserve Bank of Dallas who believe the future of housing "may not be as rosy as many Chinese believe".

Glenn Stevens, the RBA governor, said that growth in the global economy was continuing "at a moderate pace", as he announced the central bank's decision to hold its cash rate at 2.5%.

Singling out China, he noted its growth "remains generally in line with policy-makers' objectives" – annual GDP growth rose to 7.5% in the second quarter – but added that "weakening property markets [are] a challenge in the near term".

Janet Koech and Jian Wang say a "slowdown" in the housing market "seems inevitable" in an economic letter published by the Dallas Fed last week, after average house prices tripled between 2000 and 2014.

They say the flood of people from rural to urban areas – more than 400 million people have made the move since 1990 – was a key factor behind the increase in demand for, and prices of, urban housing.

The World Bank expects another 250 million to relocate over the next 20 years, but Koech and Wang insist the long-term outlook for the property market "may not be as rosy as many Chinese believe".

They point to China's aging population as a mitigating factor. The percentage of the country's population aged 24 and under has fallen by eight percentage points – to 41% – in the past decade.

"This sharp decline indicates reduced future demand for housing as fewer families will be formed," they say. "Indeed, China's birth rate peaked in 1987, and because people usually marry when they are between 25 and 30 years old, household formation may have topped out in the last decade."

As demand falls, so will prices, and Koech and Wang are concerned there may be "severe" economic consequences, as the real estate sector accounts for around 20% of GDP growth.

Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), acknowledged the Chinese authorities have been "taking steps" to address the problem, in an interview with Central Banking, but argued that "deflating a real estate bubble is more art than science".

The Dallas Fed economists say the four trillion yuan stimulus plan launched in 2009 "further inflated already-red-hot house prices", and Menon suggested this had laid the foundations for the problems the authorities are now dealing with.

"You have to deflate it gently so it does not create disruption in the real economy," Menon said. "In a way, it is not unlike the Fed unwinding unconventional monetary policies; China is also unwinding the consequences of expansionary policies in the post-crisis period."

Koech and Wang are concerned the deflation could have far-reaching impacts. While the country's short-term growth prospects could suffer, they note that "more importantly, a softening real estate market carries risks for China's financial market".

Lending to real estate developers is a popular activity in the shadow banking sector. Koech and Wang fear that a "sharp" correction in house prices could "trigger panic runs" on the sector.

"Moreover, such tumult may throw the world's second-largest economy into a deep recession and pose downside risks to the global economy," they say.