China’s authorities have spent much of the past two years trying to engineer a slowdown in property prices. Now they have got one. What happens next?

If all goes to plan, this will be an orderly affair. Prices will continue to fall on a month-on-month basis, as they did in November, when more than half of the 70 biggest Chinese cities recorded declines. After another two or three quarters of this, the nationwide peak-to-trough fall could be in the order of 20 per cent, leaving prices about 30 per cent above their 2009 lows. Authorities might then try to resume some modest appreciation, congratulating themselves on eliminating one-sided expectations of price growth without seriously damaging the broader economy. Already, after four months of progressively weaker housing data, property has dropped down the list of top investment options for Chinese households, replaced by funds and wealth management products, according to a People’s Bank survey on December 22. That is what the Politburo wants to see.

The alternative scenario is more worrying. If expectations of price declines take root, transactions could dry up altogether. Incentives may fail to gain traction just as various disincentives failed to arrest price momentum last year. Just 14 per cent of households now say they may buy homes within the next few months, close to the record low since the central bank’s survey started. Meanwhile, the biggest Hong Kong-listed China developers are trading at about two-fifths of net asset value – an ominous discounting of slowing sales, tight bank credit and downward pressure on margins. In the year ahead, investors should get used to studying Chinese apartment prices and transaction volumes as closely as they do housing starts in the US. This market was managed pretty erratically on the upside. The downside should be no different.