Risks to China Property Market Increasing, CASS Researchers Say

(Bloomberg) -- China's property prices and real estate investment are poised for slower growth even as home sales may rise to a record this year, according to a top government think tank.

Real estate is due for a "short-term adjustment period" after heating up since 2015, the Chinese Academy of Social Sciences said in a report Wednesday. Price increases and investment will slow down in the second half of 2016 and the first half of 2017, with the divide between big cities and smaller ones continuing to widen.

Property has been one of the few bright spots in a slowing economy this year. The real estate industry contributed 0.37 percentage point to economic growth in the first half of 2016, while total housing inventory has fallen by 50 million square meters from a year earlier, according to CASS. The economy expanded 6.7 percent in the first quarter and is forecast by economists to grow 6.6 percent in the second.

Sales growth slowed slightly in May, as did investment, and a two-speed growth trajectory of housing prices in big and smaller cities became more apparent. A mismatch between supply and demand in different regions is a "very big problem" as there are simultaneous supply shortages and surpluses, said Ni Pengfei, director of the National Academy of Economic Strategy at CASS and the main author of the report.

Surging prices for housing and land in big cities led to an explosion of credit and high leverage in the industry, together with an increasing default risk facing real estate developers, according to Ni. In smaller cities, inventories are huge, and developers may soon feel the pinch of inadequate cash flow, he said.

To contact Bloomberg News staff for this story: Miao Han in Beijing at mhan22@bloomberg.net. To contact the editors responsible for this story: Malcolm Scott at mscott23@bloomberg.net, Jeff Kearns

With assistance from Miao Han