China's easy policies are boosting home prices

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Chinese new home prices extended their declines in September but at a much slower pace, leaving analysts wondering if the market's losing streak is finally nearing an end.

Average new home prices fell 0.9 percent on-year, narrowing from August's 2.3 percent slide and July's 3.7 percent drop, marking the slowest decline in 13 months, according to Reuters calculations that are based on official data released Friday.

On a monthly basis, September prices ticked up 0.3 percent, the fifth straight month of gains.

Shanghai-listed property developers traded higher following the data, with Lvjing Real Estate and Vanke rallying 1 and 4 percent respectively.

A breakdown of Friday's data revealed that tier-1 cities continued to enjoy the highest gains, likely reflecting the government's efforts to loosen restrictions on property purchases in an attempt to stimulate the troubled market.

Shanghai prices spiked 8.3 percent on year, rising from August's 5.6 percent gain, while Beijing saw an increase of 4.7 percent from 3 percent previously.

Minimum down payments for second home buyers have already been cut three times this year, a move Moody's calls credit positive for property developers amid expectations for higher housing sales. Meanwhile, March saw the finance ministry exempt sellers from a transaction tax if they had owned the property for two years.

"We feel that the prices are still going up very strongly in tier one cities ... in the tier two, three and lower tier cities, there's the issue of oversupply coming in. And the oversupply will result in lower prices in order to clear the supply," Paul Tao, managing director at New Heritage Investments, told CNBC.

Dalian, Wuhan and Chongqing are among well-known second-tier cities, while Zhongshan and Dongguan are examples of third-tier areas.

Private data for both categories reveal where the bulk of national price declines are coming from. Average house prices in second-tier cities like Hangzhou and Chongqing slid an annual 5 and 8 percent respectively, according to the China Index Academy.

But with the government's help, these laggard cities could improve.

"In some of the tier-two cities that we look at, these [supportive] policies are helping demand. What it translates into is land prices going up," Tao said. Once land prices go up, property prices will eventually follow suit as well, he added.

He flags the rising cost of property in tier two-cities as potential positive factor. If that tightens supply, prices could stop dropping, he continued.

Lazard Asset Management shared that view in a note earlier this month.

"Our analysts have observed that property markets in Tier 1 and Tier 2 cities (ranked by population size) are now stable or rising, following a period of slumping sales. We find this quite encouraging as property has a more direct impact on wealth and consumption than does industrial activity."

But not everyone is as optimistic.

"The recovery in the [overall] property sector has been one of the few bright spots so far this year. However, the momentum has subsided in September," said Jacqueline Rong, economist at BNP Paribas, in a recent note, pointing to private data showing single-month property sales volume growth cooling to 9 percent on-year, from 14.7 percent in August and 18.9 percent in July.

Long-term prospects still look murky, she continued, as developers refrain from accelerating investment. Indeed, real estate investment growth over the first nine months of the year hit its slowest rate since the global financial crisis.

Because property makes up 15 percent of Chinese gross domestic product, any slowdown has widespread implications for the greater economy.

In a report published by the Center for Strategic and International Studies (CSIS) last month, new data revealed the property sector could be much larger than official estimates. The real estate sector was around 133 percent larger in 2008, "suggesting that GDP growth has been even more dependent on a property boom than previously understood," the report said.