SHANGHAI -- Eager to pay down their debts, Chinese real estate companies are increasingly resorting to lower prices in an attempt to move unsold homes.
Developers are also starting to hold back new residential projects, threatening the biggest driver of China's economic growth besides infrastructure spending.
Home prices in some of the nation's biggest cities soared in the second half of 2013, jumping more than 20% on the year here and in Beijing. But the run-up is losing steam fast.
A midtier real estate company in Hangzhou has lowered prices of some homes near West Lake, a World Heritage site, by more than 40% to 15,000 yuan ($2,400) per square meter.
Vanke, China's biggest real estate developer, is offering discounts of 400,000 yuan to 500,000 yuan on some condominiums in the Zhejiang Province city. Markdowns contributed to a 5% year-on-year drop in net profit for the January-March quarter.
Vast numbers of Chinese continue to leave rural villages for life in cities, so there is no shortage of potential demand for urban housing. But developers are prizing immediate cash flow before profits. One in Shanghai is touting discounts of up to 800,000 yuan for buyers paying in cash.
Banks and investors alike have grown wary of lending to the real estate industry in the wake of defaults on corporate bonds and "wealth management products," high-yield investment schemes popular with savers. Industrial Bank has partly stopped issuing credit to developers. Industrial and Commercial Bank of China cut outstanding real estate loans by 8.6 billion yuan last year, deeming the sector a short-term risk, according to Chief Risk Officer Wei Guoxiong.
Financing by real estate companies grew 4.5% on the year in January to April of this year -- a far cry from the 33.5% increase in the same period of 2013, figures from the National Bureau of Statistics show.
The biggest threat to the economy from falling house prices is that they set off a financial meltdown. Real estate accounts for about a tenth of investment by trust products, one of the main types of wealth management products, according to the China Trustee Association. Falling prices could trigger mass defaults.
Housing development and other forms of investment provided 54% of China's economic growth last year. Barclays sees a 1-in-10 chance of home prices dropping 15% and growth slowing to 5%.
Real estate companies have turned skittish about buying new properties for development. The city of Nanjing tried to auction off 89,000 sq. meters of land earlier this month but found not a single bidder.