China new home prices drop for the fourth month

“In the year ahead, property could easily be the biggest growth headwind,” said Larry Hu, head of China economics at Macquarie Group Ltd.

What’s going on with China’s property market?

• Many developers, like The China Evergrande Group, or just Evergrande, epitomized the “borrow to build model."

• According to Dr. Tenpao Lee, a professor at Niagara University New York, this is when, for example, a developer uses a little bit of money to acquire land, then uses a down payment from its buyers and borrows money from the bank to acquire more land, and so on.

• Now, this wouldn’t be a problem, except there are more houses (supply) than home buyers (demand). But, regardless of the market situation, these developers still need to find a way to generate cash to pay off their debts.

What happened?

• The National Bureau of Statistics showed over the weekend that new home prices in 70 cities (not including state-subsidized housing) fell 0.28% last month from November. In November, they dropped 0.33%.

• This price drop may turn off homebuyers worried about buying an asset whose value is depreciating. And this sentiment will make it even harder for developers to generate cash flow to pay off their debts.

What are people saying?

• Real estate makes up a huge part of the Chinese economy (estimates are around 25%). So because of the slump in this sector, many economists think that China will show its weakest figures in over a year once it releases its quarterly reports today.

• “In the year ahead, property could easily be the biggest growth headwind,” said Larry Hu, head of China economics at Macquarie Group Ltd.

• Some are also expecting that policymakers will loosen monetary policy to try and stimulate the economy to counter the industry slump.

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