Tonne of bricks

China’s property chickens are coming home to roost. Last week’s economic data shows that a year of falling prices is finally changing developers’ speculative behaviour.

After years of boom, most developers, like many investors, have acted as if the downward move were no more than a blip. When barred from getting bank credit, many property companies found funds elsewhere, notably through so-called trust companies, which make loans funded by short-term retail funding. Throughout 2011, developers merrily continued to add new floorspace at the same rate as they had a year earlier.

April’s data shows there has been a rude awakening. The amount of housing floorspace completed dropped off 56 per cent from the total figure for January and February, months usually lumped together to account for the New Year’s holiday. The shift is more than seasonal — the drop off was a milder 35 per cent in the previous two years.

Space under construction also failed to show its usual post-New Year spike. Overall, residential real estate investment grew four per cent year on year in April — a tenth of the rate of a year before. Adjust for inflation, and that’s equivalent no growth at all.

Since new property development accounts for about a tenth of China’s gross domestic product building, a modest slowdown will be enough to cause overall economic activity to sputter. Then there is the second-order effect — local governments depend on proceeds from land sales to fund spending on infrastructure projects. According to the official data, the value of land sales in April was only a little more than half that of March — and was a third of the monthly average for 2011.

The market is not yet in a rout. Many trusts have managed to force developers to sell their projects to distressed investors - including vehicles originally set up to buy non-performing loans from China’s banks. Hedge funds are circling the sector, and Greentown, a developer with particularly risky financing, sold some of its prime spots to rival Soho China. But if the opportunists lose faith, China’s property sector may well crash land - and the whole economy will feel the bump.