Buyers and developers face some harsh home truths

Hey, driver! Want a home? Just 18,000 yuan a square meter. An agent in downtown Shanghai took to the streets in search of buyers. Yong Kai / China Daily

When is it too much?

What would happen to China's investment and economy if property prices dropped 30 percent? This is a question international investors ask often.

For UBS Securities, the answer is fairly simple: Both fixed investment and the economy would go into a hard landing.

"Property investment accounts for more than 20 percent of total fixed investment and we estimate that almost 30 percent of final products in the economy are absorbed by the property sector," said Wang Tao, a UBS Securities economist.

A collapse of property prices, properly measured, would likely be caused by a collapse in sales for an extended period and accompanied by a collapse in property construction.

"Given the importance of the sector to the whole economy, a hard landing would be hard to avoid," Wang said. "Such a property-led hard landing scenario is quite likely in the next few years, even though we do not think the property market is about to collapse now."

Chinese officials hold a different viewpoint.

Liu Mingkang, former chairman of the country's banking regulator, reiterated on Friday that Chinese banks will be able to cope, no matter what. "Even if property prices drop by 50 percent, the banks' provision rate could still reach 100 percent - meaning the banks' principal remains safe - though interest may suffer a loss," Liu said.

As of the end of August, outstanding property loans among Chinese commercial lenders stood at 10.4 trillion yuan, 19.8 percent of the total of outstanding loans. This ratio is much lower than the average international figure, usually around 50 percent for Europe and the US, Liu said.

However, some industry analysts said such a calculation is just a static estimation.

"Considering that most of local governments' bank loans are backed by land value, once the home price drops, the land price also falls," UBS' Chen said. "At that time, the local government may need other things to fill up the value gap, indicating potential risks for bad loans from local debts."

Chen Keyu contributed to this report.