What Will Happen to China’s Property Market?

Last week when I called my parents who live China, we talked about the recent price drop happening in China’s property market. My dad told me that it seemed people were not worried about the value of the properties in my hometown which is a small town on border. We both wondered why.

I read a lot about China’s property market since their government released their new policy with restrictions on property purchases and loan applications in October 2011. I felt that the Chinese government finally realised that they needed to squeeze some bubbles off their property market before it’s too late (or it was already too late). Since then a price drop in properties in big cities has been noted in China. In Beijing, a price drop of RMB 6,000 per s/m became really common. In Shanghai, property settled in December 2011 has reached to a history low.

Property developers had to reduce the property price voluntarily or involuntarily after the announcement of the new policy. To attract new property buyers, they gave discounts, or expensive presents to new property buyers apart from offering a relatively low price. However, discounts and the low price could not convince majority of the property buyers. They were holding their money to wait for a further price drop which explained why the property settled had reached to a history low.

Chinese property investors believes that bubbles still exist in China’s property market and the property price has to be reduced by a further 40 to 60 per cent to reach its fair value. Home buyers who can afford a property want to wait because they don’t want to see a capital loss on their new home occurs even before the settlement. So it only leaves them with one option which is to wait and see. Property developers are keen to find out when investors and home buyers will start buying again. But do they have an answers?

I think how China’s economy develops in 2012 holds the key in its property market. This year will be very tough to the country and can be a milestone year in the country’s modern history. If China goes in to a recession or even an economy collapse in 2012 as some economists predicted. We can almost tell what will happen in China is a high inflation rate and a fluctuation in its currency. People will start losing jobs and they will find the properties are too expensive to afford. A bad economic climate will definitely trigger a property market collapse in China. If China’s economy can work its way through 2012, there is a chance the property market will pick up again in 2013.

The reason that property owners in my hometown were not so worried about the value of their properties was that they thought only the big cities have bubbles in the property market but not in a small town. They forgot the fact that both big cities and small towns are part of China. A major property market breakdown across the country will most likely affect the local property market.