2nd Ld-Writethru-China Focus: Polarized housing market creates policy dilemma

China's property market has shown signs of cooling, posing a dilemma for policymakers who need to shore up the slowing economy.

In July, the property sector continued to moderate, with fewer cities reporting monthly rises in new home prices.

Of 70 large and medium-sized cities surveyed in July, 51 saw new home prices climb month on month, down from 55 in June and 60 in May, the National Bureau of Statistics (NBS) said Thursday.

Meanwhile, 16 cities reported month-on-month price declines, up from 10 in June and four in May, according to NBS data.

Official data last week showed that property investment in the first seven months of the year rose 5.3 percent from a year earlier, slowing from an increase of 6.1 percent in H1, and 7 percent in the first five months of the year.

Growth in property sales in terms of floor area slowed to 26.4 percent in the first seven months, down from 27.9 percent in the first six months, and 33.2 percent in in the first five months.

The cooling should come as relief to authorities who have been worried about asset bubbles, but there are concerns that the property sector, one of the economy's major drivers, is losing steam.

A recovery in the property market starting from late last year, partially helped prop up growth in the Chinese economy, which has been weighed down by cooling investment, the cutting of industrial overcapacity and weak demand.

However, sharp increases in home prices, especially in the big cities, have fanned fears of overheating. In late July, the Political Bureau of the Communist Party of China Central Committee declared that China would prevent the growth of asset bubbles.

On an annual basis, the southern city of Shenzhen saw home prices rise 41.4 percent in July, although this growth was milder than the 47.4 percent growth in June, and 54 percent growth in May.

Prices in Shanghai and Beijing rose 33.1 percent, 22.7 percent year on year respectively.

On the other hand, less developed areas and smaller cities have been reporting falling prices and huge inventories of unsold houses.

Jinzhou, Dandong and Mudanjiang in northeast Liaoning and Heilongjiang provinces saw year-on-year declines of 3.8 percent, 2.4 percent and 1.2 percent, respectively in July.

"The property market is becoming increasingly polarized," said Ni Pengfei, a researcher with the Chinese Academy of Social Sciences.

In upper-tier cities where the economy is vibrant, abundant job opportunities, an inflow of people and money, and a lack of housing supply combine to push up prices.

The NBS put the inventories of unsold homes, mainly in smaller cities, at 714 million square meters at the end of June, only 21 million less than the previous quarter.

It may take nearly five years to destock the housing sector if homes are sold at the average speed of the past three years, said Huang Yu, a researcher at property research institute, China Index Academy.

The split picture creates a thorny task for the government, which must strike a balance between curbing asset bubbles in big cities and boosting sales in the smaller cities.

Previously, authorities have cut interest rates, reduced downpayments requirements on mortgages, and removed existing restrictions in nearly all but the top tier cities in the hope of boosting sales.

However, the loosening has largely failed to stimulate home sales in smaller cities, while further pushing up prices in larger ones.

This duality makes it pressing for authorities to create policies that avoid bubbles and reduce inventories at the same time.

Shenzhen and Shanghai have already attempted to rein in speculation. In Tianjin and Wuhan, mortgages from housing provident funds were capped in July, and banks in some cities have taken similar measures against developers.

Last week, Nanjing and Suzhou, two big cities in eastern Jiangsu Province, announced fresh measures to contain rising housing prices, including raising the minimum downpayment for second homes, and raising residential land bidding deposits.

In contrast, smaller cities are racking their brains to explore new ways to find more home buyers. Endi