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Urbanization plan could further cool China property

Apartment building, Shanghai, China
Karen Su | China Span | Getty Images
Apartment building, Shanghai, China

China's fresh urbanization plan could establish a floor for the country's cooling property market, analysts told CNBC.

Authorities unveiled the National New-type Urbanisation Plan on Monday, which detailed plans to increase the amount of Chinese people living in cities to 60 percent from 54 percent by the end of 2020, through huge investment in transport networks, urban infrastructure and residential real estate, together with reforms to the country's registration system.

(Read more: China's property market shows further signs of easing)

According to Alaistair Chan, economist at Moody's Analytics, continued strong demand for city property should put a floor under house prices.

"Now that the 70-City house price index has peaked showing that prices in the major cities are coming down, the government is under pressure to reduce restrictions. I don't think they will do that, but the new urbanization plan could be a method of putting a floor under prices," he said.

The pace of growth in China property prices slowed in February, according to Reuters' calculations based on official data released Tuesday. New home prices rose 8.7 percent on year in February, compared with January's 9.6 percent rise.

In 2013, prices rose in every month, with some large cities such as Shenzhen and Guangzhou posting more than 20 percent price rises from a year earlier, leading some analysts to conclude the frothy market is topping out.

Analysts at real estate services firm JLL said they doubt that the urbanization plan would have any short term impact on supply/demand dynamics or prices but said it would eventually lead to a moderation in prices in the long term.

"The price index will come down as the mix of units changes rather than the values coming down across the board," said Michael Klibaner, head of research for Greater China at JLL.

"There is a huge unmet need in China for properties aimed at people with median incomes and the urbanization plan directly addresses this. These properties will be be built on land further out from the city centers, and will have smaller unit sizes and less expensive facilities," he said.

Urbanization has been a core part of the Chinese government's strategy over the past decade, and Monday's announcement was part of their continued drive to help more rural dwellers migrate to cities, improving their standard of living and helping boost the overall economy.

(Read more: Is China's property sector facing a day of reckoning?)

As part of the plan, policy makers have scheduled the cancelling of the hukou registration system - which makes it difficult for a Chinese citizen to leave the place in which they were born - and eased restrictions in some mid-sized cities. However, strict policies will be maintained in cities with a population of over five million.

According to IHS Global Insight, the government's plan to increase urbanization to 60 percent will involve 110 million rural residents crowding into the cities over the next seven years.

"[This] suggests strong demand growth in housing, transport and other markets related to urbanization," said Brian Jackson, China economist, at IHS.

"While the document does not mention how much investment is required for the next urbanization wave, it will be a considerable figure given the extensive construction plans addressed in the document," he added.

(Read more: Will a weaker yuan heighten China property risks?)

According to Citi Research, the proportion of Chinese people living in the country's top three mega regions – now 18.2 percent of the population compared to advanced economies' 40 percent - is set to double in the coming decades.

China's urbanization ratio at 54 percent is markedly lower than advanced economies, which average around 80 percent.

Capital Economics estimated that the property sector contributed 9.5 percent of China's gross domestic product (GDP) in 2013.

—By CNBC's Katie Holliday. Follow her on Twitter: @hollidaykatie.

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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.