Reality check for realty sector

The stark contrast with the NBS data is because E-house tracks newly sold homes while the NBS tracks fixed residential projects regardless of whether they have been sold or not, E-house said.

Min Yuansong, co-president of Future Holding Inc, a real estate development and commercial brokerage firm, said that developers are facing acute cash flow problems, as borrowing costs have surged and buyers have to wait several months for mortgages.

"In some third－or fourth-tier cities, developers are unable to bear the funding pressures," Min said.

Su Xuejing, executive managing director of China Securities Co Ltd, said from the capital market perspective, developers cannot press ahead with the high-leveraging strategy, as the tight monetary environment makes leveraging unappealing to investors. It will also prompt investors to sell their shares, Su said.

From a macroeconomic perspective, the property industry is seen as too big to fail. The sector accounts for more than 15 percent of China's GDP and directly impacts around 40 other business sectors. Any further fallout would exacerbate the already slowing economy, experts said.

In May, the central bank urged the nation's big lenders to accelerate the mortgage approval process, to spur first-time homebuyers. But the government has refrained from broad-based easing of property restrictions imposed over the last four years to rein in prices.

Yang Hongxu, vice-president of E-house China R& D Institute, said the central bank's instructions have not been implemented in earnest by the lenders, who seem to be rather wary of such moves.

Tang Jianwei, an economist with Bank of Communications Ltd, however, feels that a certain degree of price correction is necessary for the good health of the industry. The bottom line for the government should be to ensure that the correction is not sharp enough to trigger systemic financial risks.

Analysts believe that more monetary policy easing and the removal of curbs on multiple house purchases are necessary to remove the current slack.

"Demand is still strong, but buyers are cautious. The sagging property market is like a volcano that is ready to erupt," Yan said, adding the next trigger point for the sector would come in September and October, the traditional busy season. "More impatient buyers are likely to buy then, thereby lifting sales and prices."

Based on historic data, Yang feels that property downward cycles are always shorter than upward cycles. Given the higher inventory and tighter monetary environment the current downward cycle may last about eight months. This will be followed by an average price correction of around 5 percent before prices start heading north again.

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