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September 26, 2017

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Developers relieved, buyers anxious as property controls begin to pay off

BEIJING--China's frozen property market is showing signs of a thaw. Sales took off in the second half of June and prices are rising for the first time in months.

Real estate developers will no doubt be heaving sighs of relief. The weakness of sales over the last two years has left them with large quantities of unsold property. If sales continue on their upward trend, developers will finally be able to start selling this unwanted inventory.

But the warming market will be eliciting sighs of anxiety among prospective homebuyers. Before, they were wondering how much further prices might fall. Many are starting to wonder whether they should buy now, before prices rise too far. Rising prices can have a momentum of their own. In turn, a sustained pickup in purchases could lead to a new round of construction activity as developers start to anticipate stronger demand a year or two ahead.

A revival of sales and construction activity will be welcomed by some of those concerned about the health of China's economy. The view that China is on the brink of a "hard landing" tends to be rooted in pessimism about property. It is certainly true that weaker investment in housing contributed to China's economic slowdown last year.

And if the property market continues to pick up, local officials can start to count on a revival in land sales, which until recently brought in one-third of local government revenues. Inside China and elsewhere, producers of commodities, household appliances and furniture will also breathe a little easier knowing that demand is likely to increase.

Yet despite the undoubted benefits it could bring, a rebound in property investment would probably end up doing more harm than good. For a start, China already has plenty of property to meet current demand, even taking into account recent stronger sales. It will take months to clear the backlog of completed but unsold property already on developers' books. On top of that there are countless nearly finished housing projects around the country that were put on hold until the outlook brightened. The risk of oversupply will continue to hang over the market and could worsen if developers hastily launch new projects.

It should also be remembered that the original property slowdown was deliberately induced by the government two years ago in an attempt to rid the economy of some dangerous distortions. Unfortunately, those distortions remain.

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