Investor sentiments have boomed in China’s real estate sector after the latter’s recovery as prices of residential properties surged in majority cities over the year. The rise in prices can be attributed to the nation’s soft monetary and credit policies.

Moreover, lack of suitable alternatives to housing investment has kept demand on a desirable track, pushing home prices further. Low bond yields coupled with a bearish equity market add to the asset allocation challenge. Also, tight capital controls limit investment diversification possibilities abroad, as well.

Housing data for the month of April show that prices have risen in 46 out of 70 Chinese cities through the year, compared to late 2014 and early 2015 when residential properties suffered a huge setback. Prices across the 70 odd cities rose 4.2 pct on year in April. Tier I cities witnessed 31.5 pct rise in prices, given the high demand that they face. Meanwhile, Tier II cities, which include provincial capitals, jumped 5.2 pct in prices. However, the remaining Tier II and IV categories are yet to witness a recovery in prices, since they account for two-thirds of the excess housing inventory.

Further, China’s loose monetary policy and credit policies also account for the real estate recovery. The wealth effect of higher house prices support household spending and assist the government in its efforts to rebalance the economy’s growth model toward a consumer-based framework, reports said.

"Nevertheless, the real estate sector’s importance and deep linkages with the financial system continue to represent a major risk to the Chinese outlook," Scotiabank said in a research note.

However, China’s real estate sector suffers from declining return on assets and deteriorating financial soundness. According to the IMF’s Global Financial Stability Report, real estate is among the least profitable and most highly indebted sectors in China; the median firm’s debt relative to earnings ratio (debt/EBITDA) is slightly under four, yet the ratio in real estate is over nine. The IMF shows that around 5 pct of real estate sector debt is in loss-making firms and 11 pct of the sector’s total debt is at risk, which means that the borrowers are unable to generate sufficient income to cover interest payments.

It is expected, that the Chinese government will extend notable official support to its real estate sector and support property market, when needed.