The first signs of a sharp reversal may not show up in prices anyway. The volume of sales tends to drop first, because optimistic developers will try to wait out a bad patch, hoping that better times will return. Despite the 18% rebound in May, most analysts believe sales are dropping sharply.
Developers can stay out of the market only for as long as they can stay out of the red. As their cash pile dwindles and liabilities fall due, they will be forced to sell, whatever the market conditions. To give themselves more leeway, bigger developers have turned away from fickle onshore financing to international bond markets. The 30 developers rated by Standard & Poor’s, a rating agency, raised about $8 billion of mostly five-year money in the first five months of this year, compared with $8.8 billion in the whole of 2010, itself a record year. Developers can bring this money back into the country, despite China’s capital controls, provided they show a bit of patience and a commitment to build things in unfancied cities.
Even so, the debts of many smaller developers will fall due next year. Standard & Poor’s expects property prices to fall by about 10% over the next 12 months, but it does not rule out a “price war” if distressed selling by overstretched developers begins to feed on itself. If China’s property market is a bubble, it may end with a squeal as well as a pop.