Nomura Says China’s Real Estate Market is Already Collapsing

Forget about whether or not China has a real estate bubble, and stop worrying about if this bubble could burst, Japan’s oldest securities brokerage is contending that the collapse of China’s property industry is already upon us.

According to an article in The Wall Street Journal, Nomura Securities sees the one-two punch of massive oversupply of available homes, and a shortage of available financing to take pressure off of developers as having already triggered a significant slide in China’s real estate market, and this market “correction” could bring GDP growth below 6 percent this year.

“To us, it is no longer a question of ‘if’ but rather ‘how severe’ the property market correction will be,” a team of analysts led by Nomura Chief China Economist Zhiwei Zhang contended in their report this week.

And there don’t seem to be any handy solutions for government trouble-shooters this time, as the country appears caught between the risk of aggravating already high inflation if it turns to stimulus measures, or having GDP growth slide below what it considers acceptable levels if it doesn’t take steps to bail out the property industry. “There is no policy that is universally right,” Zhang noted.

Nomura, which has a history of being pessimistic regarding China’s economy believes that the current real estate slide could pull the country’s GDP below 6 percent for 2014. The government has targetted 7.5 percent growth for this year, but has already indicated that slightly lower figures would still be manageable. Some observers fear that too rapid of a drop in economic growth could lead to civil unrest.

China Home Sales Slumping in 2014

Nomura’s downbeat outlook on the country’s real estate market comes shortly after two private surveys found evidence of slowing price growth and faltering transaction volumes in April.

A survey by a unit of E-House China found that average home prices in China during April declined on a month-to-month basis for the first time since 2012. The report tracked average home prices in 288 cities and found a decline of 0.02 percent in April compared to March.

Market data from Soufun.com’s China Index Academy found that average prices in China’s 100 largest cities rose 0.1 percent in April compared to March, although this pace of increase also showed a decline from the 0.4 percent rate reported in March.

Market Needs to Adjust to a Cutback in Credit

China’s real estate developers received a big bonus from the country’s 2009 economic stimulus program which pumped liquidity into the economy to maintain economic growth, as transaction levels and housing prices soared.

Now with housing price inflation driving even relatively well off citizens out of the home market, and threatening to build an unsustainable bubble, the government has turned off the credit spigots to try to calm the market down.

Commenting on the downturn in China’s property market Credit Suisse analyst Jinsong Du recently said, “Tight credit, with less money flowing in the market, is the main reason for the weakening sales.”

Records from the People’s Bank of China show that new credit in China fell 19 percent in March compared to a year earlier, and money supply grew at the slowest pace on record.