News Analysis: Feverish prices highlight uneven recovery in China's housing sector

Feverish home prices in top-tier Chinese cities are new signs of improvement in the housing market, but may not indicate a full recovery in the sector.

While home prices in metropolises such as Beijing, Shenzhen and Shanghai shot up, markets in small cities remained subdued due to excess stock, which the government has aimed to reduce, but with little success so far.

The housing price index for China's first-tier cities surged 24 percent year on year in January, the latest data from property service provider Savills showed.

However, second- and third-tier cities saw their price indices almost unchanged, while fourth- and fifth-tier cities continued to post drops.

Official data drew a similar picture. In January, new home prices in the southern Chinese economic hub of Shenzhen soared 52.7 percent year on year, according to the National Bureau of Statistics (NBS). Prices in Shanghai jumped 21.4 percent and those in Beijing rose 11.3 percent.

But of the 70 monitored cities, 45 still had new home prices below the levels reported a year earlier.

Analysts attributed the top-tier market revival to government easing efforts, higher expectations for price rises, as well as speculative and investment demand.

Lower borrowing costs, plus plenty of latent demand, are the primary reason for the upturn in first-tier cities, where better-paid jobs bring population inflow, said Li Yujia, an analyst with the Shenzhen Real Estate Research Center.

Earlier this month, taxes on some property transactions were slashed and further reductions to the minimum down payments for first- and second-time home buyers were announced.

Though the loosening was mainly limited to non-top-tier cities, it led to broad anticipation for higher prices and more easing.

The central bank this week cut reserve requirement ratios for banks by 0.5 percentage points, which is expected to further boost money supply and increase leverage for the housing market.

With sentiment growing positive and the stock market in turmoil, properties in major cities have been viewed as a safe heaven by investors and speculators, said Li.

In Shenzhen, of all buyers of second-hand homes since the end of 2015, 30 percent made the purchases for investment purposes, up from 20 percent in the third quarter of 2015 and triple the ratio of 2011, according to real estate agency Homelink.

Li called for government interventions to curb speculation, which he warned could destabilize the financial system.

Officials have already sent such signals. "The home prices in Shenzhen rose too fast last year ... We're studying policies to ensure the prices are in a reasonable range," Xu Qin, mayor of Shenzhen, said at a press conference in early February.

Xu Gao, chief economist at Everbright Securities, predicted more differentiated policies to be rolled out to counter excessive price growth in top-tier cities and at the same time destock the housing sector in small ones.

"Prices in top-tier cities will likely rise more slowly after such policies take effect," he said. "In third- and fourth-tier cities, market correction will continue."

As of the end of January, first-tier cities saw unsold new homes fall 12.9 percent year on year, but the inventory in second- and third-tier cities declined by only 3.9 percent and 0.8 percent respectively, according to data from E-house China R&D Institute.

There were 719 million square meters of finished but unsold properties across China at the end of 2015, up 22.2 million square meters from the end of November, NBS data showed.

With properties under construction taken into account, it will take five to six years, or even longer, to destock the whole industry, according to estimates by Xia Dan, senior researcher at the Bank of Communications.

Many third- and fourth-tier cities have introduced various incentive plans to accelerate destocking, from subsidizing qualified home buyers, loosening mortgage rules, to rewarding farmers who give up rural homesteads and buy urban homes.

Qu Hongbin, chief China economist at HSBC, predicted housing policies to loosen further in the coming months.

"Depending on the scale of the policy easing, housing investment could stabilize or even stage a moderate recovery in 2016," Qu wrote in a research note. Endi