China's property market looks to be on shaky ground with home sales flagging and prices declining, but Goldman Sachs isn't fretting about a sharp downturn in the sector.
"Our bottom line is that the Chinese housing market has some clear signs of 'froth'," Andrew Tilton and Hui Shan, economists at the bank, wrote in note. "But with several sources of pent-up demand, policymakers have a broad array of tools to deploy (and have even started to deploy some) to help support the housing market," they said.
The bubble in the housing market has been generated more from the supply side – overbuilding by developers— rather than the demand side whereby households leverage up to purchase beyond their means, Tilton and Shan said.
This means there is still scope to stimulate demand should policymakers desire to do so, they said, noting that rapidly-rising incomes and continued urbanization ensure a large pool of potential buyers in the country.
"Chinese policymakers are attentive to the risks and can avail themselves of a particularly broad array of tools to smooth the adjustment path and limit risks," they said.
Plenty of policy tools
In late-September, policymakers took bold steps to prop up the housing market, allowing a broader range of home buyers access to lower down payments and mortgage rates.
There's further scope to ease mortgage lending conditions, the bank said.
"The mortgage debt-to-GDP ratio is still low in China, so easing mortgage credit would be highly likely to increase sales, prices and construction activity, with minimal incremental financial stability risk," it said.
Alternatively, the government could provide liquidity to distressed developers or even purchasing inventory directly in order to prevent them from cutting price aggressively to liquidity inventories.
However, the bank acknowledges that managing the property slowdown won't be an easy task.