Even if the world's second biggest economy avoids a housing crash, slower property investment is almost certain to constrain growth with data suggesting it could have more of an impact than anticipated.
Chinese house prices have fallen for three consecutive months as of December, and property developers are bracing for a brutal 2012. A Reuters poll found economists expected property prices to fall 10 to 20% this year.
Chinese officials have spent the past 18 months cracking down on property speculation to try to keep the market from overheating, and it appears to be in no hurry to change course now. A housing bubble and bust would inflict far more economic damage than a policy induced slowdown.
In Beijing, which enjoyed one of the country's biggest price gains in 2010 but is now feeling the pinch of the government's tightening measures, property developers were still hoping that policymakers will loosen their grip.
‘While the central government does not generally sympathize with developers, rapidly decelerating real estate investment growth is a major concern,’ analysts at Macquarie wrote in a recent note to clients.
Real estate investment accounted for 13% of China's GDP in 2011, according to government data, bigger than the 10% estimate that some economists had assumed. China's investment in real estate development rose 28% to £635 billion in 2011, a full £130 billion more than the United States put into residential real estate at the peak of its housing bubble in 2005.
Unlike the United States, China does not have an oversupply of housing. In fact, the government has pledged to build seven million units of public housing in 2012 after an estimated 10 million in 2011.
But in order for property investment to add to GDP growth, it has to keep getting even larger each year, and with real estate prices falling and developers scrounging for credit, China will be hard pressed to outdo 2011's strong showing.
‘If they build the same amount in 2012 that they did last year, which is still a phenomenal rate of construction, then it would take GDP down to 6.6%,’ said Patrick Chovanec, an economist who teaches at Tsinghua University's School of Economics and Management in Beijing.
That would be a dramatic slowdown from 2011's 9.2% growth, and it doesn't even include potential indirect impacts that typically come with a housing slowdown, such as falling demand for building materials or a rise in banks' bad debts.
UBS economist Tao Wang predicted property investment growth would halve in 2012, less dire than Chovanec's prediction for a flat reading. ‘We continue to hold the view that property investment will slow sharply but will not collapse in 2012,’ she said.
