Is China's Property Market Heading toward Collapse?

China's property market has slowed more than expected since the first half of 2014, leading many commentators to believe this could trigger a hard landing of the Chinese economy, even a financial crisis. However, China's nascent property market is experiencing another cyclical turn. The authorities can still use many policy instruments to avoid a major market downturn or collapse. In the short run, the government could simply phase out property curb policies imposed on some 46 largest cities in China and accelerate hukou reform. In the medium term, the government could reintroduce a public housing scheme to take care of low-income household needs. The public housing program could be funded partially by levying a property tax. Meanwhile, the maturity mismatch of the mortgage portfolio in the banking system could also be better managed by allowing banks to issue covered bonds. The authorities could encourage the development of real estate investment trusts to diversify funding sources of developers. This financial instrument will not only reduce the banking industry's exposure to the real estate market but also reduce funding costs for developers to ensure adequate supply of both commercial and residential properties. Therefore, it is premature to compare the Chinese property market now with the Japanese property bubble collapse in the early 1990s or the US housing market collapse in 2008. China's continuing urbanization, available policy options, and the stage of its property market development all suggest that China's property market is experiencing simply another cyclical adjustment. Indeed, the current slowdown could catalyze the phase-out of outdated and irrelevant policies and accelerate necessary institutional developments in China's property market.