Homing in on a solution

Weakness in the property market is prompting most cities to ease purchase restrictions and other curbs. But with negative sentiment among buyers so strong, analysts warned that local governments' moves will not help much -- and might even backfire.

As of Wednesday, of the 46 cities that had imposed purchase curbs, 36 cities had publicly or quietly relaxed them, according to the 21st Century Business Herald. The remaining localities that are keeping a grip on the market include first-tier cities such as Beijing and Shanghai.

The restrictions were imposed after prices surged in 2010. The curbs included bans on purchases of multiple homes and/or tougher mortgage conditions. These policies have gone some way to curb the excessive speculation that caused the price surges.

Since the curbs were imposed, every dip in the market has prompted calls for easing. But only in the past few months has that actually happened.

"In May, any city that loosened its restrictions made the headlines. Now, people have become used to easing by one city after another," said Yan Yuejin, an analyst with Shanghai-based E-house China R&D Institute.

A delicate dynamic prevails among the central government, local governments and housing developers in terms of relaxing the restrictions. Initially, the central government took a tough stance, fearing any retreat would reignite speculation.

Developers and local governments, the latter getting the bulk of their revenue from land sales and related transactions, naturally favored a looser stance.

But after looking at the first-half figures, the central government relented. The value of housing sales in the first half of the year fell 9.2 percent, following a full-year increase of 26.6 percent in 2013. So far, the national authorities have not blocked any relaxation move by a local government.

Market participants are even speculating about whether Beijing and Shanghai, once "untouchable", would undo the shackles.

The speculation is not groundless.

First-tier cities have not been immune to the woes of their smaller counterparts. Shanghai's new home turnover in July, for example, declined 13.1 percent from June. China International Capital Corp Ltd, a State-owned investment bank, said in a report that all four large State-owned banks in Shanghai are offering discounts on mortgages.

Not everyone, however, is inspired by these developments.

Fitch Ratings Inc warned on Thursday that the easing of housing curbs could prompt renewed speculation involving residential property. It added that "another chance for the positive restructuring of the homebuilding sector in the long term" may be missed.

Fitch's view is shared by many other financial institutions: that the latest round of easing could fail to revive sales, given the prevailing negative sentiment among potential buyers, while it could set off a new round of speculation unless other steps are taken to prevent that.

"Fitch also believes the recent easing policies may extend the life of uncompetitive homebuilders, which may delay and set back the progress seen in the first half of 2014 in restructuring and consolidating China's homebuilding sector," the report said.

In May, Fitch noted that less-competitive developers were being forced out of the market or into mergers with stronger ones, a trend that it said would limit the risk of oversupply and improve the long-term health of the sector.

"Of course, governments could reimpose the restrictions if speculation rises again, but that would require much more negotiation between the local and central governments," said Andy Chang, associate director at Fitch (Hong Kong) Ltd.

Compared with the loosening of curbs, Fitch and many other institutions have said that monetary easing will be much more efficient in reversing the downturn.

Tight credit conditions are widely believed to have been a chief reason for the property market downturn that started in late 2013, as buyers found it much more difficult to get bank loans and developers struggled to raise the cash to acquire land and undertake construction.

A prime example of the importance of credit came in May, when an official of the central bank urged major lenders to accelerate mortgage approvals for first-time homebuyers. Banks have been reluctant to expand their mortgage business because of the thin profit margins.

The situation changed a bit after the government injected more liquidity into the market in response to sluggish growth in the broad economy. China's broadest measure of new credit rose in June to the highest level for that month since 2009.

A study by E-house found that a narrow measure of money supply (M1) is a leading indicator of housing price changes. Previous cycles showed that M1 led home price changes by about five months.

Thus, the accelerated growth of M1 (an 8.9 percent upsurge in June from a record low of 1.2 percent in January) indicated that downward pressure on home prices may have eased.

Local governments have also moved to improve credit conditions. Chengdu in Sichuan province, Shaoxing in Zhejiang province and Baotou in the Inner Mongolia autonomous region have promised to offer subsidies to banks for mortgages for home purchasers.

Chang said that as liquidity continues to improve, banks will feel pressure to lend more to the property sector so as not to let their funds lie idle.