China housing may have hit 'potentially precarious peak'

Beijing

CHINA'S real estate sector may have peaked and will likely become a drag on growth during economic shocks such as the current pandemic, according to a report by two university professors.

The decades-long housing boom has causes both prices and supply to be misaligned and the market may have hit "a potentially precarious peak", according to the working paper by Harvard University's Kenneth Rogoff and Yang Yuanchen of Tsinghua University in Beijing.

Housing is still unlikely to be the trigger for an imminent financial crisis due to regulatory protections like high down payments, they wrote.

Both the household income and demographic growth that supported the boom have slowed recently and the downward trend is expected to continue, argues the paper, which was published by the National Bureau of Economic Research in the United States.

China's over-reliance on the sector and its strong links to other industries such as furnishings and leasing services mean the effect of a drop in housing activity could be amplified across the economy.

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Real estate and its related industries contributed roughly 29 per cent of China's gross domestic product, the paper estimates.

"We find that a 20 per cent fall in real-estate activity could lead to a 5 to 10 per cent fall in GDP, even without amplification from a banking crisis, or accounting for the importance of real estate as collateral," it said.

Despite the Chinese authorities' capacity to intervene and regulate the market, the current situations "will make finding a soft-landing challenging" and "even modestly declining prices, compared to the usual pattern of ever rising prices, could pose a considerable risk", the report added. BLOOMBERG