Many people argue that the current economic pressure stems from weak consumption, mainly because homes and cars are not selling. Other sectors like tourism, dining, and emotional spending cannot compensate for the decline in these high-value purchases. When car sales slowed, authorities launched a rural auto initiative to tackle overcapacity. This has led some to speculate that if home sales falter, the government might cut interest rates to help developers clear inventory. From there, the logic extends to inflation, which could potentially push housing prices higher.

At first glance, this reasoning seems sound. Historically, when economies struggle, central banks lower rates, which often leads to monetary expansion, inflation, economic stabilization, and rising asset prices. However, this time around, the pattern appears broken. Interest rates have been steadily declining, yet inflation remains absent, and deflationary pressures persist. Home prices continue to fall. Recent CPI data shows a decline, with month-on-month figures turning negative for the last two months. Despite these poor numbers, foreign media reports suggest that rate cuts are still being considered.

So why haven't recent rate cuts triggered inflation? First, it's important to avoid a mechanical view of history. Lowering rates doesn't always lead to inflation. To understand this, we need to examine the fundamentals of money printing and liquidity injection. The government cannot simply print money at will. The central bank requires collateral, typically foreign currency earned from trade or domestic debt, to issue an equivalent amount of RMB. Although trade volumes are robust and surpluses are record-breaking, China's foreign exchange reserves have actually been shrinking. This is because exporters, having earned US dollars, are reluctant to repatriate them. As a result, this channel is not only failing to generate new money but is also reducing the money supply.

The current approach to easing through rate cuts relies entirely on debt growth. Lower rates reduce borrowing costs, theoretically encouraging more people and businesses to take out loans. The central bank can then issue RMB against this debt, increasing the money supply and potentially leading to inflation. This mechanism worked before, most notably after the 2008 financial crisis when China launched a massive 4 trillion yuan stimulus. The government borrowed heavily to fund infrastructure projects like roads, high-speed rails, and bridges. This injection of money into the economy naturally led to inflation and a housing boom.

But the situation is different now. The key difference is that infrastructure investment opportunities are largely saturated. There are very few high-return projects left to fund. Borrowing has become less attractive because the return on investment is too low. Additionally, local governments are burdened with high debt levels, and revenue from land sales has dropped. They are now under strict orders to cut spending and avoid any non-essential projects. This is why, despite lower borrowing costs following rate cuts, no one is actually borrowing. Without new debt, no new RMB can be printed. This explains why interest rates are falling while inflation remains elusive. The money simply isn't circulating.

A savvy investor should repay debts before others do. Repaying debt reduces the money supply, a process known as balance sheet contraction (Assets = Liabilities + Equity; repaying debt reduces both liabilities and assets). This contraction leads to deflation, which is the phase we are currently experiencing. Selling assets to hold cash before this contraction makes cash more valuable. With the same amount of money, you can now buy more homes, cars, appliances, clothing, and services than you could a few years ago. In the housing market, many people are choosing to wait and hold cash as prices decline. This strategy allows them to avoid losses during deflation while benefiting from the increasing purchasing power of their money.

If rate cuts are not directly linked to rising home prices, what indicators should we watch? Many point to M2 money supply, but this is imprecise because M2 money doesn't necessarily flow into the stock market or real estate. Historical data shows that M2 has continuously increased in most countries, but housing prices haven't always followed. For example, after Japan's bubble economy burst, M2 continued to rise, yet Tokyo housing prices fell by 70% over the following 14 years. The most relevant economic indicators for housing prices are household income and the willingness to take on debt, specifically mortgage loans. For household income, one can look at reports from foreign banks, like UBS's findings on a broad slowdown in income growth. Personal experience from your own industry and those around you can also be a useful gauge. For borrowing willingness, watch the data on new household loans. In China, most household borrowing is still for home purchases, while other consumption is minimized. Taking out loans for non-housing consumption is rare, even with consumer loan rates as low as 3%. A decline in new household loans signals danger for home prices. Unfortunately, this data is indeed declining sharply. The annual increase in Chinese household loans peaked in 2021 and has been falling since, with last year's figure being a fraction of that peak.

Some real estate agents point to a drop in listings and a rise in transaction volumes as a sign of a healthy market. However, the underlying reality is that the entire country is trading volume for lower prices. Even in first-tier cities, which have held up relatively well, prices are now starting to decline. The result of this "price-for-volume" strategy is the disappearance of debt, reflected in the decrease in new loans. With fewer loans, the central bank is forced to shrink its balance sheet, reducing the RMB supply and deepening deflation. This deflation, in turn, further depresses the economy and negatively impacts housing prices, creating a vicious cycle. The decline in household loans is also negative for banks, as mortgages are their highest-quality assets. Falling home prices lead to more defaults and foreclosures, shrinking bank assets. This may explain why the LPR has not been cut recently, as banks are already under significant pressure. When the central bank released the latest LPR data on June 22nd, many market participants, including homebuyers and short-term stock traders, were betting on a cut in the 5-year LPR. However, both the 1-year and 5-year rates were kept unchanged. Without a lower LPR, the incentive to buy homes diminishes, leading to a lack of buyers and perpetuating the cycle.

Real estate is deeply intertwined with the Chinese economy, and falling home prices have created numerous negative feedback loops. The economy will need time to absorb the negative impact of the property sector. Finally, to answer the question of how to tell if the property market has bottomed out, look at two indicators. The first is the price-to-rent ratio, which is a broad strategic measure. The second is new household loan growth, which is a more tactical, near-term indicator. The first is like checking the fundamentals (is the logic sound?), while the second is like watching the price action (is capital currently favoring the asset?). If an asset lacks both solid logic and positive sentiment, it is time to cut losses. This analysis of the housing market has been consistently validated by market trends. Helping families avoid making costly mistakes can sometimes change their entire financial future.