China house prices to fall 10-20pct in 2012

China's average home prices will probably fall between 10 to 20 per cent in 2012, a pace modest enough to prevent a hard landing of the economy, with the biggest declines expected in major cities such as Beijing, a Reuters poll showed on Tuesday.

The poll of 21 respondents, including economists and property market analysts, showed China will stick with purchase restrictions to regulate the real estate markets, but may tweak those measures if prices fall too precipitously.

China's red-hot property market helped power double-digit economic growth in recent years, but it has become a source of worry now that prices are falling and will continue to do so.

Of the 21 respondents, 11 expected price declines of 10 per cent to 20 per cent in 2012. Another nine thought the price decline would be less than 10 per cent and one thought prices would increase.

Property investment is worth about 10 per cent of Chinese economic output and fuels activity in 50 other sectors, so a steep slide could tip the economy towards a hard landing.

There is no clear definition among economists of what constitutes a "hard landing", nor the scale of the fall needed in the property market to trigger one, but a 30 per cent price drop would wipe out the majority of average homeowner equity and take a substantial bite out of China's consumer spending.

"The Chinese property market is peeling off faster than markets expected," said Alistair Thornton, a Beijing-based economist at IHS Global Insight. "The sharp slowdown risks undermining China's soft-landing trajectory for 2012."

"As prices and transaction volumes plummet, there is a danger that this will feed directly through into lower construction activity and investment spending, yanking the carpet out from under the economy," Thornton added.

Europe's debt crisis is pushing many developed economies into recession and, as the biggest export destination for Chinese goods, its drag on the world's second biggest economy has become more apparent in recent months.

The slowing economy and evidence of capital outflow in the last quarter of 2011 prompted the central bank in November to cut 50 basis points from the ratio of reserves commercial lenders are required to hold, in order to keep money supply and credit growth steady.

While some believed this was a clear change in the People's Bank of China's tightening stance, a separate poll of economists said only a sharp slowdown in growth to below 8 per cent or a pop in the real estate bubble could likely trigger outright interest rate cuts or fresh stimulus spending.

Inflation is expected to fall to 4.0 per cent in December from the previously reported 4.2 per cent and data released last month showed that factory activity shrank in China due to slackening demand, reinforcing the need for pro-growth policies.

"China will broadly keep the same tightening measures in 2012 as in 2011 but fine-tuning of the policy is possible," said Tang Jianwei, an economist with Bank of Communications, China's fifth-largest lender, in Shanghai.

With a faltering economy on one side and a need to curb property markets from overheating on the other, Beijing has its work cut out.

The fall in prices comes as little surprise after the restrictions imposed on homebuyers but it is difficult for policymakers to orchestrate a gradual decline. A steep slide could prompt an easing, though respondents thought it unlikely.

Only six of 21 respondents thought China would lift the restriction on the number of homes a family can buy.

The more likely shift would be a reduction in the minimum down-payment. Three out of four economists thought that might happen some time in 2012, most likely in the second quarter.

Last week China announced that it may look to roll out its property tax scheme to more cities.

When asked to pick which city would see the steepest fall, 8 respondents predicted Ordos, the rich mining town in Inner Mongolia, would earn that dubious distinction, while Wenzhou and Beijing received six votes apiece.

Ordos, a district of Inner Mongolia, now lies as a prime example of a property bubble bust. This prosperous coal-mining region where prices once skyrocketed during the boom of 2004-2009, now houses a virtually empty city and is predicted to see a 30 per cent decline in prices from the peak.

Wenzhou and Beijing will likely see price declines of at least 20 per cent.

On a scale of 1-10, where 1 is extremely cheap and 10 extremely overvalued, respondents gave Chinese houses a rating of 7, indicating house prices are elevated and a likely to decline further.

As cities mirror Ordos' decline, restrictions are clearly biting property developers. New home sales have slowed, raising concerns developers will default and saddle banks with bad debt.

China Vanke, the country's largest developer by revenue said last week its year-on-year sales fell 30 per cent in December..

China's average home price started to head south in October, according to a Reuters weighted index based on the numbers announced by the National Bureau of Statistics. A private survey showed Chinese home prices fell for a fourth straight month in December.

The story wasn't too different in property markets in Britain where the ensuing euro area crisis thwarts any hopes of a recovery this year and in the US where property markets continue to struggle to find its footing.

The lone bright spot might be Brazil, whose real estate sector which will see modest growth in 2012 and avoid a bust according to a recent Reuters survey.