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China Rate Cut, What's in It for the Property Market?

Shanghai-listed property stocks gained on Friday following an overnight cut in lending rates on expectations the move would boost demand for homes, however, Barclays says the policy easing will do little by way of making housing more affordable.

BEIJING, CHINA - APRIL 09:  A potential buyer visits the 2011 Beijing Spring Real Estate Trade Fair on April 9, 2011 in Beijing, China. Property prices in big Chinese cities keep increasing and according to the National Development and Reform Commission, housing prices in 70 major Chinese cities rose 13.67 percent in 2010.  (Photo by Lintao Zhang/Getty Images)
Lintao Zhang
BEIJING, CHINA - APRIL 09: A potential buyer visits the 2011 Beijing Spring Real Estate Trade Fair on April 9, 2011 in Beijing, China. Property prices in big Chinese cities keep increasing and according to the National Development and Reform Commission, housing prices in 70 major Chinese cities rose 13.67 percent in 2010. (Photo by Lintao Zhang/Getty Images)

According to the bank's calculations, the 25 basis points cut in the benchmark lending rate will lead to a 2 percent reduction in home prices.

Andrew Lawrence, Director of Property Research at Barclays says this marginal drop will not make property more affordable and hence is unlikley to ramp up demand.

While home prices across the country have been in a steady decline over the last seven months due to measures by Beijing to rein in speculative buying and stabilize prices, they are still regarded as out of reach for the average homebuyer.

According to independent economist Andy Xie, property prices in the mainland need to fall 50 percent in order to become more accessible for end-users.

“Chinese property prices must come down from the price for speculators to the price for end-users – the gap is very large,” Xie told CNBC.

Lawrence says the lack of affordability will force the government to extend its property tightening measures such as the restriction on purchases of second homes, which would be negative for property stocks.

Funding Crunch to Ease, But Risks Remain

While easing funding costs, as a result of the rate cut, will take some pressure off some developers, Lawrence says those that turned to private trusts and to the shadow-banking sector for funding are unlikely to see any change in financing costs.

Over the past 12-18 months, private developers have found it difficult to access bank lending, forcing them to turn to alternate sources of funding. This led interest rates charged by trusts to spike above 20 percent at the end of last year, according to Reuters. They have since fallen to around 13 percent in May.

“Trust lending has accounted for over 25 percent of all domestic loan borrowings by developers over 2011 and is unlikely to see any change in its financing costs as a result of this lending rate cut,” Lawrence said.

A slowdown in property space has led to a wave of small, cash-strapped real estate companies filing for bankruptcy in the recent months and with around 60,000 developers in China, analysts expect more failures ahead.

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