On July 6, Kenneth Rogoff, professor at Harvard University and former chief economist of the International Monetary Fund, speaking through a television interview in Hong Kong warned of a looming shock in the Chinese property market and its possible impact on the banking system if a significant property price fall is triggered.

The forewarning came days after Xu Shaoshi, the country's minister of land and resources, expressed his expectations for a broad range price correction in the fourth quarter as the cash flows of developers tighten.

Unlike stock and commodities markets, property is a unique asset class that has a direct impact on the livelihood of the country's citizens, in virtue of which it deserves stricter governmental monitoring and regulations. A major price crash could mean a catastrophic aftermath for any economy - both in scale and duration. It has been over 20 years since Japan's property collapse, but Japan is still suffering from the burst housing bubbles that wiped out billions of dollars nationwide - a process that history appears to be repeating in the US.

Here at home, the Central Government is definitely adopting a more direct approach in an attempt to cool off the sector compared with policies adopted two years ago. The stringent down-payment requirements, restrictions on third home purchases along with other measures set by the State Council in April have successfully forced speculators to exit the housing market. Transactions on new homes plummeted 25 percent in May and new home sales in Beijing, for example, declined 30 percent month-on-month in June.

Nevertheless, new home prices have remained stable since April. Over the past few months, developers have been reluctant to take the initiative in cutting prices, instead choosing to delay or reduce the size of new projects launched, while keeping a close eye on the Central Government's latest policy development. Almost all developers are anticipating a price drop, but no one is taking the initiative to act first. The unwillingness on price cutting from the developers may relate to the fact that the value of unsold units is pledged as collateral to banks that the developers borrow from.

The developers may be fighting an uphill battle on price cutting or fire sales, as market participants are no longer anticipating price appreciation, instead expecting a significant price adjustment downward.

Rents in Beijing, Shanghai, Guangzhou and Shenzhen have all been picking up since April, which may suggest that demand for new homes is shifting to the rental market while buyers wait for the price adjustment to come.

According to Centaline, in June secondary home prices in the above four major cities fell in tandem.

With the diminishing demand and continuing accumulation of inventory, new home prices are set to decline. While the degree of adjustments may vary geographically, a 15 to 25 percent average price cut nationwide seems imminent. If prices are not falling into the affordable range for average home buyers, and with rents surging to put upward pressure on the CPI, the Central Government will likely continue to depress prices with additional measures. It has learned of the danger of housing bubbles from the developed countries and is willing to take adequate precautions and measure to cool off the heating sector even at certain cost to domestic GDP growth.

The author is a visiting professor at the Asian International Open University, an international financial commentator on NOW Business News Channel and founder of www.wongsir.com.hk. The opinion expressed in this article is entirely his own.

(HK Edition 07/13/2010 page3)