Property prices in China are likely to halve over the next two years, according to Cao Jianhai, professor at the Chinese Academy of Social Sciences, a government think-tank, in a strong sign that the country’s economic downturn faces further challenges in spite of recent positive data.

Slumps in both the property market and exports have taken its toll as they were both leading drivers of the booming Chinese economy in the past decade. Jianhai said an apparent rebound in the property market was unsustainable and driven by a flood of liquidity and fraudulent activity rather than real demand. He told the Financial Times he expected average urban residential property prices to fall 40-50% in the next two years from levels at the end of 2008.

Average urban housing prices across 70 cities fell -1.3% in March from a year earlier but were up +0.2% from February, according to figures released yesterday by the National Bureau of Statistics (NBS). That broke seven months of declines and was accompanied by a rebound in transaction volumes.

Residential property sales rose +8.7% from a year earlier in Q1 2009 in terms of floor space sold, compared with a fall of -20.3% for all of 2008.