China Housing Curbs Kick In, So Why Are Stocks Up?

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Mainland shares of property developers continued their two-day rally sharply higher on Tuesday despite the announcement over the weekend that Beijing and Shanghai will enforce the property curbs announced in early March.

The Chinese government has been trying to cool its red-hot property market and has called for stricter enforcement of a 20 percent capital gains tax on home sale profits and asked cities with fast property price increases to raise the down payment requirement and mortgage rates on second homes.

Michael Klibaner, head of research Greater China at Jones Lang LaSalle said property stocks are staging a relief rally, because the measures were not surprising.

On Monday, Shanghai-listed shares of major real estate counters were up over 2 percent, outperforming the benchmark that closed down 0.1 percent. The rally continued on Tuesday with property shares up over 3 percent in morning trade, while the Shanghai Composite made modest gains of 0.4 percent.

"I guess the market may have been prepared for something worse, so maybe it's a relief rally," Klibaner told CNBC. "My interpretation is that people were prepared for worse."

(Read more: Beijing, Shanghai Vow to Enforce Property Cooling Measures )

The fact that only three cities, including Chongqing, have so far announced the implementation of these curbs and the dilution of some of these measures - like Beijing saying the capital gains tax could be waived under certain conditions - eased some investor fears.

Xianfang Ren, senior economist at IHS said nothing in the measures announced on Saturday by the three cities had exceeded the broad guidelines the central government had set on March 1 and it won't add additional pressure on the housing market.

Plus, a private survey on Monday showed that average home prices in China's 100 biggest cities rose for the 10th straight month in March, providing further momentum to stocks.

(Read more: China Home Prices Up for 10th Month in March: Survey )

Nicole Wong, regional head of property research at CLSA, said latest earnings of property developers also show they are poised for growth this year.

For example, Vanke - China's biggest property developer - reported in February that profit rose 30 percent in 2012 from a year earlier, beating market expectations, on rising home sales despite the government introducing cooling measures over the past three years.

"Many developers are promising strong growth in fiscal year 2013, mainly by market share gain," Wong said. "Their growth path will not be dislodged except by very draconian tightening measures, which seems not the case now as tightening is focused on a few key cities."

-By's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu