Real Estate

Is China loosening its grip on the property market?

John Phillips | CNBC

The People's Bank of China's (PBOC) call on the nation's major lenders to give priority to first-time home buyers when allocating credit marks a policy shift for the government that has been on a near-five-year tightening campaign to cool the market.

"It's clear that Beijing is concerned about the pace of cooling in the residential real estate market," Dariusz Kowalczyk, senior economist and strategist at Credit Agricole told CNBC.

"This is a very clear change in direction of policy - that's why the equity market has reacted so positively," he said.

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The Hang Seng Properties Index rose almost 2 percent on Wednesday - following news the central bank had asked commercial banks to speed up the process of granting of home loans and to set mortgage rates at reasonable levels late Tuesday.

Tight mortgages are a factor behind the property market slowdown this year as lenders have raised home loan rates for first-time buyers or delayed granting mortgages due to tighter liquidity.

China's home price inflation slowed to an eight-month low in March. Average new home prices in 70 major cities rose 7.7 percent on year, easing from the previous month's 8.7 percent rise, according to Reuters' calculations.

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Meantime, home sales in the four months ended April fell 9.9 percent, after slumping 7.7 percent in the first quarter.

Economists read the PBOC's move as a form of targeted policy easing to mitigate the decline in property sales.

"Credit is the most important driver of the property market - the policymakers have realized which lever they need to pull to arrest the downward trend," said Wei Yao, China economist at Societe General.

"However, they will be cautious in how much credit reacceleration they will allow," she said.

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Zhiwei Zhang, chief China economist at Nomura believes these measures alone are not significant enough to turn around downward momentum in the property sector, and expects more easing measures, such as the removal of local resident purchase restrictions in tier 2 and 3 cities.

A few local governments, including the eastern city of Tongling in Anhui province and Ningbo, the coastal city of eastern Zhejiang province, have loosened home purchase rules in recent weeks.

Tongling, for instance, cut down-payment rates to 20 percent from 30 percent for certain buyers, Reuters reported, quoting the city government website.

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Zhang also expects an easing in monetary policy though 50 basis point reserve requirement ratio (RRR) cuts in both the second quarter and third quarter.

Decreasing the amount of cash that lenders must hold as reserves tends to stimulate economic activity as they have more assets to loan out.

"If monetary policy loosens in the next few months, which is our baseline case, we expect the property sector to stabilize and growth to recover slightly to 7.5 percent in the second-half," he said.