Nothing goes up forever, not even the price of Chinese real estate. According to an article published today, May 13th, in the New York Times, the 20-year-long Chinese real estate bubble is finally beginning to deflate.

Chinese Real Estate Investors

A Chinese government report published Tuesday announced that housing starts plummeted more than 25% last month from a year ago. This is likely to have significant economic ramifications in China where residential real estate activity has come to account for more than 10% of all economic output.

Furthermore, prices for new and old apartments have begun declining, and the number of deals is also slipping. The total square footage of residential real estate transactions slumped nearly 16% in March, as sellers were slow to offer the discounts that buyers are now demanding.

Deliberate decision by government to cool off Chinese real estate markets

The Chinese real estate market correction is clearly a deliberate decision by China’s leaders.

The NYT article highlights that the Chinese leadership has been increasingly concerned over the that housing prices were rising to unaffordable levels, and that the economy was becoming overly dependent on real estate investments, and decided to take action.

The result has been a series of policies to deflate the Chinese real estate bubble. The  measures include punitively high interest rates for mortgages on second homes and an outright ban on the purchase of third homes. Furthermore, over the last couple of months the central bank has taken steps to keep short-term interest rates above the rate of inflation.

Impact of real estate slowdown on overall economy

The question financial and political analysts are asking is how much further the real estate market will slump, and how much of an impact will this slowdown have on other sectors of the economy, especially the banking system.

Real estate developers have stopped plans for new projects and are slowing down work existing projects, such as laying off workers and shipping limited materials to building sites. Economic data published Tuesday reported a slowdown in industrial production, with growth in steel and cement output off significantly. April retail sales were also sluggish, with the furniture market under pressure as less people moved into new homes.

Centaline, China’s largest real estate brokerage firm, transactions declined by 50% in Beijing and Shanghai year over year for the May 1 holiday weekend, usually one of the strongest times of the year for real estate sales.

Related to this, the NYT article points out that some of the recent Chinese real estate restrictions, especially in the financial sector, are already being lifted.