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Chinese Property Bubble Popped Severe Correction Likely

News Posted On: 13 July 2010

China property prices fell in June in a further indication that the government's attempts to cool the market are bearing fruit after several attempts.

According to the government index, which indexes prices in 70 cities, house prices fell 0.1% in June. Obviously this is not a major fall, and could just be a blip, but given the record growth levels and the severity of the government's recent measures, one can't help but believe that it is the first fall in many.

A fall after such growth, and at such a time when the government is determined to cool the market -- we all know what happens when the Chinese government gets determined about something -- it will take a huge chunk out of the confidence levels of Chinese investors. This will make avoiding further falls very difficult, and a severe and lengthy correction the most likely short-term future for the Chinese property market.

At best this dent in investors' confidence will almost certainly make them think twice about continuing their speculative practices, which will slow demand. At worst investors could start trying to offload properties to grab their profit before it disappears into the abyss of price deflation. If that happens the market will be flooded with supply, at a time when demand will undoubtedly drop off, which could lead to a severe correction in the Chinese property market.

That said: it is worth remembering that this is the Chinese housing market that we are dealing with here. It is certain that a percentage of the rapid growth can be put down to the rapid population growth and rising affluence therein, which is giving massive numbers of Chinese the means to buy their own homes. These buyers will still be buying, and could lead to the market being sustained at a flat level.

That is assuming that the June price drop does not represent a lull in demand from these buyers, as they have been priced out of the market. If that is the case then a correction will likely be inevitable as the combination of the government measures squeezing out speculators and reduced demand from home-buyers puts a complete strangle-hold on demand.

Exact data on buyer demographics is not forthcoming, but even without it, now that a spike has been inserted into the bubble of growth, further price falls will be hard to avoid. Look's like we will get a chance to find out whether or not the Chinese economy can withstand the shock of a severe correction in the housing market.

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