China will increasingly manage its troubled property sector at a local level as it seeks to avoid sparking either an abrupt slowdown that undermines the economy or another surge in prices, according to government economists involved in policy discussions.
After increasing at double-digit rates through most of last year, home prices started cooling in late 2013 as a sustained campaign to clamp down on speculative investment and easy credit gained traction.
Annual growth in average new home prices slowed to an 11-month low in April, official data showed on Sunday. Existing home prices dropped from a month earlier in 22 of 70 cities in April, compared with 14 in March.
Data last week showed property sales dropped 6.9 percent in the January-April period from a year earlier in terms of floor space, and fell 7.8 percent in terms of value.
Authorities know a severe property crunch could worsen a build-up of debt, but also that a blanket easing of restrictions could set off another round of credit-fueled house price rises.
"There is no sign that the central government will relax property controls on a nationwide scale even though the economy is slowing," said Zhao Xijun, deputy head of the Finance and Securities Institute at Renmin University in Beijing.
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"The pressure is mainly on local governments, because some of their debts are maturing and they need to repay."
Local governments rely heavily on revenues from land sales to fund debts that official data show total 17.9 trillion yuan ($2.9 trillion), so price falls and slowing sales have sparked concerns about their ability to service their debts.
The economists expect restrictions on property introduced over the past five years to largely remain in place, particularly in major cities, but with some local authorities given leeway to support their markets.
Some smaller cities, including the eastern city of Tongling in Anhui province and Ningbo, the coastal city of eastern Zhejiang province and the southern city of Nanning in Guangxi, have started to loosen home purchase rules.
Back in 2012, Beijing forced governments in areas including Wuhu, Foshan and Chengdu to retract plans to ease controls on real estate, but there has been no such response this year.
"They (policymakers) are still watching. Property prices have started to fall but they still don't see any serious problems," said a senior economist at a government think-tank in Beijing.
"The bottom line is that a property slowdown doesn't trigger financial risks," said the economist, who spoke on condition of anonymity.
Drag on growth
President Xi Jinping has said China should adapt to a "new normal" of slower growth as the government pushes market-based reforms to cut debt levels in the economy and generate more sustainable long-term growth.
The cooling real estate market helped drag annual economic growth to an 18-month low of 7.4 percent in the first quarter, and a sustained fall would risk China missing its economic growth target for the fist time in 15 years.
Standard Chartered said official figures showed 17 months stock of apartments in Tier 1 to Tier 3 cities, which cover China's major metropolises, including Beijing and Shanghai.
"The momentum is clearly negative. This downturn appears worse than previous episodes - the scale of oversupply is likely to be larger, and policy makers are understandably more hesitant to step in with immediate support," Standard Chartered economists said in a report.
The government is still trying to deal with the hangover of a 4 trillion yuan stimulus package implemented in 2008-2009, which insulated China from the global crisis but also created piles of local debt and record house prices.
"It's natural to relax controls if property prices fall. Our purpose is to curb price rises and we should relax if prices no longer rise," said Zhu Baoliang, chief economist at State Information Center, a top government think-tank.
"I don't think property prices will rise further. On the contrary, the downward pressure is big."
Last week the central bank called on banks to speed up the granting of home loans to first home buyers, although that is seen having only a limited impact.
"Even a meaningful increase in mortgage supply shouldn't fundamentally change the worsening property market conditions."
Many economists believe that if the economy slows further, the central bank will cut banks' reserve requirement ratios around the middle of the year. That would support activity, but it is a broad-brush policy that authorities can't fully control.
"We need to keep liquidity relatively loose to help safeguard economic growth," said Li Huiyong, chief economist at Shenyin & Wanguo Securities in Shanghai.
"But money has no label and we cannot rule out the possibility that money will drive up property prices, even though it has yet to lead to improvement in the economy."