China’s property rescue package: Will it work?

A scale model of the Mission Hills Lan Kwai Fong development and residential properties stands on display in a showroom at Mission Hills Resort Haikou in Haikou, Hainan Province, China.
Brent Lewin | Bloomberg | Getty Images
A scale model of the Mission Hills Lan Kwai Fong development and residential properties stands on display in a showroom at Mission Hills Resort Haikou in Haikou, Hainan Province, China.

The latest steps to rescue China's sagging property sector are among the most high-profile yet, but don't expect a market turnaround, economists say.

Late Tuesday, the People's Bank of China and China Banking Regulatory Commission announced measures to support housing sales and increase lending to cash-strapped property developers.

"These measures are substantial enough to improve sentiment and sales on the property market," Louis Kuijs, chief China economist at RBS wrote in a note.

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"[But] we do not expect this package to lead to a rapid recovery of the real estate sector... given the inventories of unsold housing and additional large volumes of housing in construction but not finished hanging over the market," he said.

New measures include granting second-home buyers that have paid off their first mortgage access to lower mortgage rates and lower down-payment requirements. Now they're eligible for a 30 percent discount on mortgage rates, an offer previously limited to first-home buyers. Down payment levels were also cut to 30 percent from 60-70 percent.

In addition, banks were asked to support the funding needs of "quality" developers, increase their access to the bond market and introduce pilot programs for REITs.

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Worrying signs

An acceleration in China's property market downturn in recent months intensified concerns about slowing economic growth.

New home prices fell for the fourth straight month in August, down 1.1 percent from the month before, after dipping 0.9 percent in July, according to Reuters' calculations of figures released by the National Bureau of Statistics.

Many analysts have cited the cooling property sector as a major risk for the economy. The sector accounts for about 15 percent of gross domestic product and is linked to some 40 industries from furniture to steel.

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"In our view, such relaxation of property policies is part of a broader effort by policymakers to support growth, even though – based on recent comments by senior policymakers – we do not expect very large and high profile measures," said Kuijs.

Although the measures are clearly positive, their actual macro impact is hard to assess at this point, said MK Tang, senior China economist at Goldman Sachs.

"Their effectiveness will depend not least on whether other constraints, such as the already-high loan-to-deposit ratio, remain binding and continue to limit banks' capacity to make new mortgage and real estate loans," he said.

Chinese laws cap banks' loan-to-deposit ratios at 75 percent, which means banks can lend no more than three quarters of their deposits.