China Center Chart Dive: Watch out for a housing price down-cycle and its knock-on effects

Juxtaposed against China's recent up-cycle in housing prices, its money supply has been edging near a down-cycle, and dipped into it in July. Money supply measured in M2 stock increased 10.2 percent YTD in July, down 3 percentage points from the same period last year. If previous correlations hold true, the housing market is likely to follow the money supply and move into a down-cycle in the short-term.

It is important to note that a down-cycle in the housing price means slower price growth, and not necessarily negative price growth. However, the impact of slower price growth on the real estate sector can still be significant. During the most recent real estate pricing down-cycle in the first half of 2015, for example, even though the housing price increased 6 percent, “housing starts” (i.e., construction) contracted 16 percent. Housing construction is the most critical driver of industrial demand, and the sales of the newly constructed properties also drive retail sales of furniture, home appliances, and decorative materials. Thus all sectors with housing market exposure will experience headwinds that accompany a housing price down-cycle.