Investors continue to watch Chinese markets for any sign that the country’s inevitable slowdown will turn into something worse. While property markets are noisy, a recent drop from 4Q13 levels has convinced analysts at Nomura that we are seeing the beginning of a steep drop.

“We had a high conviction that property investment growth will slow in 2014, but we did not expect such decisive evidence as early as Q1. To us, it is no longer a question of “if” but rather “how severe” the property market correction will be,” writes Nomura analyst Zhiwei Zhang.

China housing starts fall 20% from last year

The smoking gun is that new housing starts, a strong leading indicator for the real estate market as a whole, is down more than 20% year on year, bringing the total volume to the lowest level in almost five years.

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Property sales have also fallen in volume terms, though not by nearly as much. Property sales by price have continued to grow, but Zhang argues that this is because land prices are still rising and some better locations were offered for auction, and that weakening sales will have to bring these prices down.

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Monetary tightening triggered current drop

Funding for property developers rose 6.6% year on year during the first quarter, compared to a 21.2% jump in 4Q13, as advance payments and self-raised funding falling the most, and Zhang points to tightening monetary policy last summer as the reason for the drop.

“We believe the correction in the property market was triggered by monetary policy tightening that started in mid-2013,” writes Zhang. “The turning points in M2 growth match the turning points of property sales and transaction-based prices reasonably well, and lead the turning points of property investment growth.”

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If monetary policy is the reason why the property market is falling now, then it stands to reason that the Chinese government might institute some subtle easing measures. China has indicated that it wants to avoid policy easing, but the government has to balance long-term risks against pressure to keep GDP growth from falling below 7%.

If no other policies are put into place, Zhang estimates that property investment growth could slow to 13.8% by the end of the year, dragging GDP growth down from 7.7% in 2013 to 6.7% in 2014, a scenario that Zhang doesn’t expect to play out.