Home prices correction is good for economy: spokesman

As some cities in China relax controls on purchases of residential properties, some analysts are wondering if the trend might spark another round of speculation in the boom-bust cycle. Others question whether looser restrictions will make any difference at all.

In recent weeks, property purchase restrictions in 80 percent of the 46 cities that imposed them have been loosened or outright rescinded.

From Hohhot and Shenyang in the north to Haikou and Foshan in the south, from Hangzhou and Wuxi in the east to Chengdu and Xi'an in the west, governments beset by flagging housing markets have begun to relax policies on who can buy how many homes and on what mortgage terms. The central government, which launched the assault on property speculation and soaring home prices several years ago, has remained conspicuously silent.

The easing of the curbs, which started in April, began as minor fine-tuning in lower-tier cities such as Nanning, Tonglin and Wuxi. In ensuing weeks, it picked up momentum. Loosening has come in various guises, including subsidies for homebuyers, reduction in down payments and removal of restrictions on how many homes a family may purchase.

The moves reflect deep economic anxiety at the local level. An earlier Moody's Investor Service report forecast that a deepening property downturn could shave 1.5-2 percentage points off China's GDP growth in the absence of any offsetting policy response.

"The relaxation of home purchase restrictions may fail to boost sales meaningfully in light of the prevailing negative sentiment among potential buyers," global rating agency Fitch said in its latest report. "More significantly, further relaxation, without the introduction of other speculation-cooling measures, may pose the risk of encouraging and re-igniting speculation on residential property in the long term, as was experienced in 2009."

China's residential market tilted to the soft side in the first six months of this year, with new housing sales sinking in both value and volume.

Oversupply dominates

In the first half, the value of new homes sold around the country dropped 9.2 percent from the same period a year ago to 2.56 trillion yuan (US$416 billion), the National Bureau of Statistics said last month. The volume of new homes sold fell 7.8 percent to 256.3 million square meters.

Tight credit at banks and persistently high home prices have tended to sideline buyers and contribute to record housing stock inventories in most cities, analysts said.

"Oversupply first emerged in China as early as 2011, mainly characterized by slack housing sales in small and medium-sized cities," the Chinese Academy of Social Sciences said in a report released on July 28. "That trend started to appear in larger cities this year."

In Shanghai, for instance, the stock of new homes, excluding government-subsidized affordable housing, stood above 11.6 million square meters as of Friday, according to the city's official real estate website. That compared with about 700,000 square meters in July. In the first half, 4.06 million square meters were sold in the city, and Shanghai Deovolente Realty Co said that equaled a 40 percent drop from the second half of 2013 and a year-on-year decline of 33 percent.

"The recent relaxation of home purchase restrictions around the country won't change the overall southward trend in the domestic housing market, which is currently experiencing a deep correction," said Alan Chiang, head of residential property at DTZ China. "The market is expected to remain subdued amid a prevalent 'wait-and-see' attitude among potential homebuyers, even in the face of high inventories."

Since 2011, new home starts in China have outnumbered sales by about 1.2 billion square meters, DTZ said, making oversupply an extremely serious problem, particularly in smaller cities.

Fitch has warned that the loosening of property curbs, if significantly expanded, might produce negative results.

The recent easing may help keep uncompetitive developers afloat and set back progress on the restructuring and consolidation of China's homebuilding sector, Fitch said. In the first half, some uncompetitive developers did exit the industry, allowing players with stronger operations and finances to survive. That is the way forward for the industry, Fitch concluded.

Sheng Laiyun, a spokesman for the National Bureau of Statistics, said last month that the current correction in the residential housing market is good for both the economy and the industry.