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After rapid increases in 2013, property prices are cooling now on tighter financial conditions and market jitters over slowing GDP growth and financial fragilities. This moderating trend should help to curtail price misalignments, which we estimate to have widened in 2013.
• We find a widening of housing price misalignments although the overvaluation remains modest (between 5-10%) based on our in house model of equilibrium prices for real state in different Chinese cities.
• Nevertheless, we expect prices to continue to increase in the coming year, but at a more moderate pace, as the authorities ease policies to sustain growth momentum. Risks of a collapse in the housing market are low given the likelihood that macro policies will be geared towards sustaining growth at above 7%. Nonetheless, the reliance on shadow bank financing may bring further downside risks as the authorities strive to curb shadow banking.
• Existing property tightening measures are likely to remain in place. The focus now has shifted to supply side measures to curtail rapid price gains and ensure affordability. A national property tax remains on the medium-term agenda.
• Over the medium term, we maintain our view of a robust outlook for the housing market given projected income growth and urbanization which should support demand.