"Please see this article on China property prices...with their bubble now bursting, just how bad could things get, Seems like the perfect storm for being short."

Eoin Treacy's view Thank you for this article which is sure to be of interest to other subscribers. Here is a section:

Land transactions in 133 cities tracked by Soufun Holdings Ltd. (SFUN), the country's biggest real-estate website, fell 14 percent by area in August from a month earlier. Prices of new homes declined in 16 of 70 cities compared with July, according to government data.

Property construction is a mainstay of investment that last year drove more than a half of economic growth while land sales contributed 40 percent of revenues earned by local authorities that have amassed 10.7 trillion yuan ($1.67 trillion) of debt. A funding squeeze on property developers risks a "domino effect" as companies needing cash cut prices, forcing others to follow, Credit Suisse Group AG said yesterday.

"We're reaching a tipping point where land sales are dropping much faster than before, developers are losing more access to bank financing, and housing prices are showing weakness," Nomura's Zhang said in an interview in Beijing yesterday.

The price of land in the Chinese capital slumped 76 percent in August from a month earlier, while in Guangzhou it plummeted 53 percent, according to Soufun.

China Real Estate Information Corp. (CRIC), a Shanghai-based property information and consulting firm, estimates 40 percent of overall local government revenue came from land sales last year.

The price of property where my mother-in-law lives in southwest Beijing, between the 1st and 2nd ring roads, is currently CNY26,900 per square metre which is down slightly from where it was this time last year. This article from GlobalTimes.cn helps to put this figure in perspective. It cities a salary in Beijing as CNY57,600 per annum for someone with a Masters degree.

Property prices are high by any standard but have begun to moderate as the PBoC's tightening measures appear to be starting to have an impact. Mrs. Treacy reports that various Chinese language blogs are filled with people talking about an imminent decline in property prices. This is exactly what the government wanted when it announced almost two years ago that property prices were rising too quickly for comfort. A recent announcement that a million affordable homes will be built by 2015 is an ambitious target and should help to moderate prices further if it comes to fruition.

This spread between the Chinese 10-year and 2-year bonds has fallen to 12 basis points from 200, which is an indication of just how tight monetary policy has become. Soft landings are difficult to engineer. The absence of a property tax has made local governments overly dependent on land sales to raise capital. If house prices move into a downtrend, which cannot be ruled out, the government will have to come up with a mechanism to fund local government. In such a scenario tightening measures imposed over the course of the last two years could be reversed quite quickly.

The Shanghai Property Index and the FTSE/Xinhua A600 Banks Index are both already pricing in quite a lot of bad news. These two sectors are also highly sensitive to tighter monetary conditions. The stock market has been among the worst performers over the last 18 months so that valuations are now quite reasonable by historical standards. Rising property prices have been a factor in persistently high inflation so while a slow down in Chinese property prices would undoubtedly have negative repercussions in the short term, over the medium-term it could prove to be the catalyst to stoke investor demand in the stock market once more.