Real Estate

Is property still China’s top economic risk?

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Things may be looking up for China's property sector, after new home prices in first tier cities from Shenzhen to Shanghai – a leading indicator for the rest of the market – staged a modest rebound in April.

New home prices in Beijing, Shanghai, Guangzhou and Shenzhen rose 0.7 percent, 0.6 percent, 0.4 percent and 1.8 percent, respectively, in April from the month before, the National Bureau of Statistics reported on Monday.

"The first tier cities are a harbinger of things to come for the whole country, so with prices rising on a month-on-month basis in Beijing, Shanghai, Guangzhou and Shenzhen – this is a confirmation that the tide is turning," Dariusz Kowalczyk, senior economist at Credit Agricole told CNBC.

"It will take a few months before the majority of cities report gains, but we can be sure it will happen," he said.

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Overall, average new-home prices in China's 70 major cities were flat compared to the previous month, as stability returns to the market on the back of measures to measures to prop up demand, including three interest rate cuts in the past six months.

Prices have yet to stage a recovery on an annual basis, however, down 6.1 percent in April from a year earlier.

Nevertheless, with green shoots emerging in the property sector, analysts say the threat of the sector's slowdown to the broader economy has subsided somewhat.

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China's property sector is closely watched as it contributes an estimated 15 percent of the mainland's gross domestic product (GDP), with many analysts pointing to concerns over the potential for overbuilding to spur debt defaults among developers.

"The level of threat at this point is lower than it was a few months ago," said Kowalczyk. "However, it remains a risk because there are a lot of unsold homes in the market."

Li-Gang Liu, chief economist, Greater China at ANZ Research agrees the market is showing signs of a recovery, but is wary about whether it will extend beyond second tier cities.

"Easing measures have started to make an impact on the property sector. I expect gains will start extending to second-tier cities with vibrant industries and fast population growth," Liu said.

But, "third and fourth tier cities will remain stagnant as they tend to see population outflows rather than inflows, so in the short-term, their property prices will remain depressed," he added.

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Cities in China are divided up into tiers to reflect population size, development of services and infrastructure, economic size and the cosmopolitan nature of the city.

"While the data may no longer be as bearish as before, this doesn't mean there's no risk in the sector," Liu added.

Economic impact

Even though the property market is bottoming out, it doesn't mean the sector will start adding to growth just yet, say economists.

"The property market is rebounding too late for it to contribute to the government's goal of 7 percent growth," said Kowalczyk

"Developers have to work through inventory before they revive their construction activity," he added.

Property investment growth slowed to 6 percent in January to April from a year earlier, easing from 8.5 percent in the first quarter.

In order to meet its growth target, Beijing will need fund more infrastructure construction to plug the hole in weak private sector investments, Kowalczyk said.

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