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China's property market may not be as bad as it looks

A pedestrian walks on a bridge in front of residential buildings at the Sino-Singapore Tianjin Eco-city in Tianjin, China.
Tomohiro Ohsumi | Bloomberg | Getty Images
A pedestrian walks on a bridge in front of residential buildings at the Sino-Singapore Tianjin Eco-city in Tianjin, China.

The first fall in Chinese home prices in two years has crystallised worries of a messy end to a housing boom, but some analysts say fears of an imminent collapse similar to that in the United States after the sub-prime crisis are overblown.

The property market has definitely been slowing this year, and is cited as one of the main risks to the health of the world's second-largest economy.

But high downpayments, low household debt, some government support - and expectations of more to come - have some experts forecasting the downturn will be short lived, with prices expected to recover as economic growth steadies in the second half of the year.

Read MoreIs this the biggest macro risk China faces?

Average new home prices across 70 cities fell 0.2 percent in May from April, and the annual rise of 5.6 percent was the slowest in 13 months. Prices fell on a monthly basis in 35 cities, official data showed on Wednesday.

"If you look at China from the balance sheet point of view, the only balance sheet that has not been destroyed is the household balance sheet," said Bo Zhuang, an economist at Trusted Sources, a U.K.-based investment consultant.

"It is the most healthy balance sheet at the moment."

The International Monetary Fund agrees. In a paper published in April, it ranked China as having the fourth-lowest level of household debt among 11 Asian countries, at around 12 percent of its gross domestic product (GDP).

In New Zealand and Australia, where households are the most indebted, debt levels exceed 90 percent of GDP, IMF data shows.

Downpayments of 30 percent for first home purchases and between 60-70 percent for second homes, and laws which make borrowers liable for debts even if they default on repayments have banks viewing mortgages as among their safest assets.

Read MoreChina's May home prices rose at slowest pace this year

It also means those who fear that a sharp decline in home prices would rock China's financial sector by inundating banks with bad debt may be overstating the case.

Further, a reduction in the amount of reserves that banks must hold to boost lending to small firms and the farm sector has inadvertently freed up some cash for the property sector.

"Funds are like water," said Fan Xiongchong, vice-president of Sunshine 100 China, a mid-sized developer based in Beijing. "Eventually, it will more or less flow into the property market via various channels."

Read MoreA turning point at last for China's economy?

Not without risks

This is not to say the housing market, which accounts for about 15 percent of GDP, is without risks.

For one, despite the moderation this year, prices are still near record highs and affordability rates near an all-time low. Construction has also fallen sharply this year, which would affect employment and spending.

The statistics show that Wenzhou, a wealthy city with a thriving private sector, has been hardest hit in the current slowdown with prices down 4 percent in May from a year ago.

Read MoreChina's economy is at a 'tipping point'

Experts disagree about the extent of housing oversupply in China, but agree that slower property investment would be a drag on the economy. A sharp drop in home prices would destroy household wealth, undermining confidence and spending.

"Comfort comes from the fact that we see the Chinese government taking action - they are not oblivious to what is happening," said London-based Yerlan Syzdykov, an emerging markets debt fund manager at Pioneer Investments.

"That's why this 'stop-go' policy... on one hand they want to cool off the market, and on the other they don't want it to hurt growth," Syzdykov said, referring to earlier and prolonged government attempts to rein in red-hot home prices.

No big crash

The biggest problem is a misallocation of resources, said Ting Lu, an economist at Bank of America-Merrill Lynch.

With only about one-third of the 1.3 billion population living in urban centres, too many homes that will never be filled have been built in small cities. That would likely see a sharp spike in bankruptcies among small developers, Lu said, but would not cause "a big crash".

Wages in China are still growing faster than house prices, with average incomes in cities and rural areas climbing 10-12 percent last year, on par or faster than a 10 percent rise in property prices.

"This is a cyclical correction," said Rosealea Yao, an economist at Gavekal Dragonomics. "We see no signs of imminent collapse."

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.