Concerns about a possible collapse in China’s property market continue to grow. However, our research suggests that fundamentals are more robust than many people think. The biggest danger lies in the potential for policy mistakes.

Investors are understandably worried about the headlines coming out of China’s property sector. Sales fell in July after having seemed to stabilize in June. For the first half of this year, sales nationally fell by 6.7% year over year, to Rmb3tn (US$488.4bn). That’s the first time such a steep fall has occurred since 2011.

We see three reasons for the sector’s slowdown. The main cause is China’s credit tightening, but there’s also the base effect created by extremely high sales in 2013 (a result of strong pent-up demand in 2012) and the country’s overall economic slowdown. Each of these stems from government policy. Credit expansion fueled demand for property in 2012. Now, the government is rebalancing the economy so consumption will play a much bigger role alongside investment as a driver of growth.