China's housing market will continue to slow this year, but analysts say new government incentives on the horizon should spark a rebound.

The measures include possible tax and interest rate reductions and more-liberal lending practices.

Analysts said the efforts are needed to help developers who are facing severe capital pressure as a result of bank credit controls designed to fight inflation.

Potential home buyers, meanwhile, have been sitting on the sidelines waiting for the market to hit bottom.

"It was not a good year for China's real estate industry," said Yin Zi, an analyst who works for Shenyin & Wanguo Securities Co.

China's residential property sales fell 13 percent year on year during the first eight months of 2008, and in August alone sales plummeted 42 percent from a year earlier.

But Li Shaoming, an analyst at China Jianyin Investment Securities Co, believes the contraction in property deals does not indicate an underlying weakness.

"People are just postponing their purchases," Li said. "The demand will hardly subside as so many people in China need to buy a home."

One major ray of hope for property developers is that the government has taken a clear position on boosting the real estate sector.

On October 8, the central bank cut interest rates and reserve requirements for commercial banks to expand market liquidity and stimulate economic growth. It was the second 0.27-percentage-point reduction in a month. The earlier cut, on September 15, was the first rate reduction since 2002.

With the support of the central government, local authorities have introduced a series of rescue measures.

Shanghai on Wednesday raised the mortgage ceiling by as much as 20 percent for some households that participate in the public housing fund, a government program that provides reduced interest rates.

In July in Hunan Province's Changsha, the city government cut the down payment for the purchase of a first home from 30 percent to 20 percent, and the mortgage period was raised from 20 years to 30 years.

In Shenyang in Liaoning Province, the government cut in half the property deed tax to encourage sales.

In Nanjing, capital of Jiangsu Province, buyers were guaranteed direct subsidies for home purchases.

Industry sources said the biggest hope for a market recovery is their expectation that more government stimulus measures will be issued by the end of the year.

Yin of Shenyin & Wanguo expects the new policies to include the removal of restrictions on the purchase of a second property by an individual, further reductions in the deed tax and looser lending rules for developers.

Wang Qing, a Morgan Stanley economist, said the stringent mortgage lending rules may be eased and mortgage interest rates may be lowered further.

(Shanghai Daily October 16, 2008)