‘While the exit of small developers would not pose a problem, the failure of large promoters could put some bank lending at risk, perhaps triggering negative chain reactions. A key risk is an overly quick liquidation of unsold property,’ the Paris based OECD’s report says.
China's economy, the world's second biggest, is predicted to expand by 8.5% next year even as export growth is pulled down by weak demand and a decline in the nation's competitiveness, the report said.
Government housing projects can help to support construction and moderating inflation may allow Premier Wen Jiabao's government to cut interest rates from the middle of 2012, the OECD said.
Vice Premier Li Keqiang said last week that the property market is at a ‘critical stage’ and indicated that curbs should be maintained even as sales fall. October housing transactions declined 25% from September and prices fell in 33 of 70 cities, according to government data.
China Vanke, the country’s biggest publicly listed developer, has said that it may adjust prices at some projects though it has no plans to do so nationwide.
‘Individuals have been holding back from purchasing houses and developers carry a rising level of unsold inventory,’ the OECD report says, adding that a property slump could hurt migrant workers relying on construction work and buyers facing losses.
‘The turning point of China's home prices has come. Prices not only fell for new homes and in major cities, but also in secondary cities and in the existing home market,’ explained Shen Jian-guang, an economist at Mizuho Securities.
A downturn in the housing market could have damaging implications for growth as real estate investment accounts for between 6 and 10% of GDP, according to various estimates. A slowdown would not only hit household wealth, but also the highly active construction industry.
Analysts have warned that house prices are about to fall sharply. Mark Mobius, chairman of Franklin Templeton Investments' Emerging Markets Group, reckons they will fall between 15 and 30% over the next two years. BNP Paribas has predicted a 10% fall by the second half of next year.
‘The target is to control fast rises in property prices without sharp falls, which may cause economic and social instability,’ said Regina Yang, a Shanghai based director at property consultancy Knight Frank.
And according to Wee Liat Lee, a property analyst at Samsung Securities, the government should start to be cautious about property prices over correcting on the downside as it will inevitably affect the economy.
