The performance of property market is diverse among different cities after the National Day golden week holiday. Some cities like Guangzhou recorded a slide on average prices in the primary market, while some cities like Beijing and Shanghai recorded a surge on transaction volume w-o-w due to the lagging cases after the holiday. Therefore, the effects of the latest cooling measures launched ahead of and during the holiday have not been clearly shown yet.

Home prices are determined by demand and supply of properties. Cities with higher price growth are those with better sales performance and relatively low supply. Demand may change for the following reasons. First of all, the government’s real estate control measures are going to contain people’s purchasing power. Moreover, the skyrocketed prices which are far exceeding residents’ income level may constrain demand. From the investors’ point of view, the cooling measures may cause them to become more prudent or pessimistic to the house market. While for the factors that may change supply, the obvious ones include the government’s land supply and the real estate investment by developers. If analysing carefully, one would find that the fundamentals of the property market appear to be similar after the launch of control measures – overall tight supply and downward interest rates, both are factors that support property prices to rise.

Since developers doubt whether brisk sales can continue, they tend to be more prudent in real estate investment, results in slowing growth of real estate investment. It will increase the imbalance of demand and supply in the market, which may in turn raise the difficulty of maintaining stable prices. Property bubbles are due to the expanding money supply and low interest rate. Since the interest rate has never been as low as the current level, we cannot tell when the property bubbles will burst based on the past situations. If the low interest rate can result in continuous economic growth, normalisation of monetary policy will not be a problem; in contrast, if the low interest rate cannot bring economic growth, and interest rate cannot continue to go downward, property bubbles will burst.

The latest round of cooling measures can stop some of the buyers who are unqualified from purchasing houses, but as the fundamentals of the market are more or less unchanged, home prices are unlikely to drop significantly. Real estate has been a main driver of China’s economic growth, but the slowing real estate investment will undermine this favourable effect.