China’s house prices have continued to fall, sparking concerns that a drop in the nation’s economic growth could spell bad news for Australia.
The real estate sector has been a key contributor to the country’s economic growth in recent years and a slowing trend will impose greater pressure on other parts of the economy to provide growth momentum, particularly if the government aims to maintain its current growth target, according to a NAB Group Economics report.
Over the first eight months of the year, sales of residential property fell by around 11 per cent annually (on a square metre basis), while new starts for residential buildings fell by 14 per cent over the same period, the report said.
Trends in commercial property markets have also been comparatively weak – with the IMF noting oversupply across most regions.
“Concerns around the potential impacts of a slowdown in property markets have resulted in a loosening in government policies in a range of cities,” the NAB report said.
“This has included removing restrictions on purchases by non-residents and lowering the deposit thresholds for property purchases,” it said.
NAB expects weak conditions to continue amid reports of excess capacity and falling prices, however the bank said it is unlikely that prices will fall far enough to trigger a large scale property sell-off.
This is largely due to the structure of Chinese mortgages and the comparatively high level of equity in homes, the report said.
However, a weakening Chinese property market is likely to put downward pressure on demand for Australian minerals as the construction of new homes slows.
“China’s steel sector has faced challenging conditions this year – with recent improvements in profitability reflecting sharper declines in raw material costs rather than improved steel prices (which have fallen in recent years),” NAB senior economist Gerard Burg said.
“Weaker construction should result in downward pressure on steel prices, placing greater pressure on domestic producers – potentially impacting demand for Australian resources,” Mr Burg said.
“Much like the property sector, steel remains a key component of the Chinese economy and the process of reorganising the industry is a major challenge for the government. This reflects competing priorities – excess capacity and poor profitability versus the importance of employment in maintaining social stability,” he said.
The broad property sector has been a major contributor to China’s economy growth over the past decade, but is now slowing.
“IMF analysis shows the weakening investment in real estate will shave real GDP growth – making the 7.5 per cent growth target more difficult to obtain (particularly in the absence of stimulus),” Mr Burg said.
NAB expects China’s growth in 2014 will be below target at 7.3 per cent, and continue to slow in 2015 to 7.0 per cent in line with IMF forecasts.