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China Property Curbs May Knock 10% Off Prices

Hong Wu | Getty Images

China's latest measures to crack down on property speculation and investment demand could lead to home price declines of up to 10 percent over the next six months, according to analysts, driven by a fall in transaction volumes.

Chinese real estate stocks were heavily sold off on Monday, with Shanghai-listed shares of Vanke and Gemdale sliding as much as 10 percent, as investors digested Beijing's tightening policies announced late on Friday. Beijing called for stricter enforcement of a 20 percent capital gains tax on home sale profits and asked cities with fast property price increases to raise the down payment requirement and mortgage rates on second homes.

The government also called for stricter and wider implementation of anti-speculative measures, known as home purchase restrictions (HPR), first put in place during 2010. Cities that implement the HPR only in downtown districts will have to extend them to the whole city, said analysts.

"This earlier-than-expected move suggests that the authorities are deeply concerned over a return of the property market boom, which may rekindle an asset bubble," Liu Li-gang, chief economist, Greater China at ANZ wrote, noting that there has been a strong rebound in property prices in tier one cities since the fourth quarter of 2012.

Average home prices across China's 100 biggest cities have been on the rise, climbing 0.8 percent to 9,893 yuan ($1,600) per square meter in February - the ninth straight month of gains - according to a private sector survey published on Friday.

The timing of the property curbs comes ahead of the country's once-a-decade leadership transition which concludes in March.

"The moves represent the outgoing leadership slamming its hand on the table, saying you have to pay attention," said Paul Guest, Asian strategist at LaSalle Investment Management.

Price Declines

Over the next three to six months, Raghav Bhandari, analyst, Asia-Pacific real estate at CreditSights, expects the measures to lead to a 5-10 percent correction in home prices in major cities - which are targets of investment demand and have seen a run-up in home values in recent months.

Home prices in tier one cities such as Guangzhou, Beijing and Shenzhen for example, rose between 3.5 percent and 4.7 percent in January, from a year earlier.

Alvin Wong, property analyst at Nomura agrees that first tier cities could see price declines of up to 10 percent over the same time period as home upgraders hold off purchases to avoid the higher capital gains tax. 30-35 percent of overall property transactions in China come from buyers looking to upgrade their homes, estimates Wong.

While Du Jinsong, head of Asia Property Research at Credit Suisse said transaction volumes in the housing market will be affected, overall prices are unlikely to go down as long as liquidity remains abundant.

Demand for Luxury Homes

One segment of the market that may be impacted, however, is high-end property, said Du.

Second-home buyers, a target of the new cooling measures, are a large driver of demand in this segment, said analysts.

"The local government will restrict the sales volume of high-end projects, so the average selling price for the city comes down," Du said.

Bhandari of CreditSights added that developers with a focus on luxury properties including Singapore-listed Yanlord could be the most vulnerable given their exposure to the space.

(Read More: Here's Why Hong Kong Has to Meddle With Property)

For Yanlord, whose shares fell over 6 percent on Monday, the vast majority of their buyers already own a home, so their customer base would be impacted by some of the recently announced measures, he said.

On the whole, however, he said the majority of Chinese property developers are well diversified in both the mass market and high-end segments.

"Chinese property developers are in a good financial position at the moment - they have had a robust 12 months of sales, they haven't taken on much leverage. It's the smaller, unlisted firms at risk of the policy changes," he said.

Buying Opportunity

Discussing the selloff in property stocks, Bhandari believes it is a temporary knee-jerk reaction that offers an attractive buying opportunity for investors.

"For the past eight months, people bought the stocks on hopes the government would be focused more on boosting the economy, rather than controlling the property market. [So] Their reaction is a little overplayed," he said.

(Read More: Vanke Earnings: China's Top Property Developer Posts Profit Rise)

Over the longer-run, Liu of ANZ, noted that property demand will remain intact, given mass urbanization in the country.

"Policies will always have a temporary, noisy, and negative impact on the sentiment. However, they will not have much lasting impact because Chinese urbanization is still undergoing and its long-term demand will not suddenly disappear," Liu said.

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  • Diana Olick serves as CNBC's real estate correspondent as well as the editor of the Realty Check section on CNBC.com.