New measures to curb lending and the rising inventory relative to demand will force property developers to reduce home prices in mainland China from Q3 2011, according to Knight Frank.
The international property consultant said that the supply of new homes in China’s 10 major cities will continue to rise. Overall transaction levels will remain relatively low, although property activity picked up last month.
Meanwhile, there has been a growing concern about bank lending limits, as the central government increased reserve ratios twice in quick succession, on 18 May and 20 June 2011. The ratio now stands at a record high of 21.5 percent, up six times in the course of a year.
Knight Frank said that this had “the effect of tightening developers’ credit.”
In terms of increasing inventory levels, the firm said it will take 11 months for the property market to absorb all available inventories in the 10 major cities, given that the sales rates remain similar to the previous quarter’s average.
“We believe rising inventory and funding pressure will suppress home prices from the third quarter,” said Knight Frank.
Sales of new homes in 10 major cities last month rebounded from a month ago but were still relatively low. Prices of new homes, adjusted for difference in property location, fittings, type and other factors, rose 0.7 percent month-on-month.
Data collected by Knight Frank and property consultant Holdways from 35 mainland cities showed that year-on-year sales volumes in May were down in most cities, with Chongqing recording a total sales decline of 43.6 percent, 26.1 percent in Tianjin, 24.4 percent in Chengdu and 23.8 percent in Beijing.
The slight rebound in home sales was mainly attributed to lower prices and increased supply in some cities: month-on-month price declines were significant in Shenzhen and Tianjin, where a total respective decline of 7.1 percent and 1.9 percent was recorded.
However, Knight Frank said that a sharp and widespread drop in home prices is not on the cards.
“In the short term, price cuts are not expected to figure prominently…given that developers’ financial strength has not deteriorated markedly,” it said.
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