The FTCR China Business Activity Index was above 50 for a third month in November, but only just. Mortgage rates rose again, offsetting improvements in the freight and export sectors.

Most FTCR data for November showed the economy continuing to defy expectations earlier in the year of a fourth-quarter slowdown. However, China’s growth outlook hinges on the fortunes of its real estate market and our latest snapshot indicates that rising rates are having a negative impact on sales activity, and this will feed through to the wider economy.

The near-term outlook for China’s housing market is not positive. The government is removing the stimulus it used to boost the market in late 2015 and early 2016. The leadership views real estate speculation as a threat to financial stability, reducing the likelihood that local governments will loosen the restrictions they have been imposing on their markets over the past 18 months. In the longer term, the government wants to nurture rental markets and introduce a property tax to end the speculative frenzies that so regularly obsess urban China.

For now, the market remains supported by a widespread belief among Chinese consumers that house prices will keep going up. According to our latest survey, 64.4 per cent of consumers said they expect prices to rise over the coming six months. That marks a five-month low but also compares with just 41.5 per cent in September 2014, at the height of the previous tightening cycle.

We believe rising house prices, and expectations for further increases, have led to the striking improvement in consumer sentiment since government stimulus in early 2016. The FTCR Consumer Index hit a record high in November; at 75.6, it is 9.9 points higher than in November 2015, when households were reeling from that summer’s stock market crash and a botched currency devaluation in August.

Measures of sentiment towards house buying, for either investment or living in, were at or near record highs in November, while consumers are reporting that a greater proportion of their income is coming from investments, and less from salaries.

Although this reflects the proliferation of fintech investment alternatives, bricks and mortar remain the biggest and most desirable asset class.

A reliance on rising house prices leaves consumers vulnerable to the gradual slowdown in the market that we expect as credit tightens further. Mortgage rates continued to rise in November and this will lead to slowing sales and investment.

Key official October indicators missed expectations as pollution curbs and housing market restrictions drag on the economy in the fourth quarter. But this is a shallow slowdown and the government remains on track to meet this year’s growth target of 6.5 per cent.

Our measures of internal and external trade in November suggest activity was stable relative to October. However, hiring managers reported that the growth of demand from the construction sector weakened sharply while wage inflation across all sectors continued to increase at the lowest levels on record.

We expect China’s slowdown to become more pronounced in 2018, provided the government is willing to follow through on its commitment to focus on the quality rather than the quantity of growth. If credit tightens and economic growth falls below 6.5 per cent in 2018, this would signal official appetite for making good on reform pledges. On the other hand, intervening once growth falls below target — as the government has done so often since the global financial crisis — would demonstrate the players have changed but the game remains the same.

The FTCR China Business Activity Index is a composite reading of business activity and sentiment based on our surveys of companies in the real estate, export and freight sectors. For individual survey methodologies click here. A full set of survey results can be found in our Database.

FT Confidential Research is an independent research service from the Financial Times, providing in-depth analysis of and statistical insight into China and Southeast Asia. Our team of researchers in these key markets combine findings from our proprietary surveys with on-the-ground research to provide predictive analysis for investors.