'Home prices to continue to increase'

Housing prices will rise more slowly in the second half than in the first, but upward pressure will persist, prompting experts to call for "long-term" policies that can be adapted to market forces.

"Local governments face great embarrassment because their property curbs have become increasingly irrelevant to the market," said Yang Hongxu, vice-president of the Research Institute of E-house China, at a recent symposium in Shanghai.

In March, the central government announced a 20 percent capital gains tax on pre-owned home sales. Several cities announced detailed policies of their own at the end of March.

But sales only slumped briefly. Market activity was brisk in the second quarter. Prices have kept rising.

According to the China Index Academy, a Beijing-based real estate research organization, the average housing price in 100 cities was 10,258 yuan ($1,671) per square meter in June, up 4.55 percent from January.

In Beijing, which has the toughest curbs, prices rose 10.8 percent in the same period to 27,783 yuan per sq m.

According to the National Bureau of Statistics, housing prices in 63 of the 70 cities that it monitors rose month-on-month in June, compared with 65 in May.

Most experts interviewed by China Daily said prices will keep rising for the remainder of the year, although momentum will slow.

They noted that housing investment, a leading indicator of the property market, is picking up. Developers' financial health greatly improved during the second-quarter sales boom, meaning housing investment was being scaled up, particularly in first-tier cities.

Already, land markets in first-tier cities are heating up, with surprising premium bids at auctions in Beijing, Shanghai and Guangzhou. The higher land prices will initially at least translate into higher housing prices.

Second, housing transaction volume is high because of robust demand and supply.

On the supply side, developers usually offer more units in the second half. On the demand side, the number of first-time home buyers is still high. Demand is being boosted by an increasing number of buyers seeking to trade up.

"Prices will be buoyed by buyers' expectations that prices will rise indefinitely, given the fact that prices remained stubbornly high under the last round of curbs," said Lian Ping, chief economist of Bank of Communications.

However, analysts also said that whether on a month-on-month or year-on-year basis, price gains will be smaller in the second half of this year than in the first half.

An important reason is that China's property market didn't warm up significantly until the second half of last year. Thus, the first-half base of comparison is lower than that for the second half, according to He Tian, head of research at the China Index Academy.

Another factor is property tax, a long-anticipated move to rein in housing prices that is expected to be imposed in more cities beyond the pilot sites of Shanghai and Chongqing.

Given the moderate outlook for the second half of the year, most analysts said further tough curbs are less likely to be announced by the central government.

Analysts said current policies, mainly administrative measures, do not align with the "market-oriented" reform the new leadership is pushing. Further, they noted, GDP growth in the second quarter slowed to 7.5 percent and is expected to dip further in the third quarter.

Thus, the central government will be very cautious about further steps to cool the property sector, which has proven to be very effective in shoring up the broader economy when the manufacturing sector is weak.

'Long-term' view

As home prices are still under upward pressure, talk of establishing a "long-term" stabilization mechanism is gaining momentum.

According to the Economic Observer, a domestic weekly, China has in the past 10 years adopted 43 "property market adjustment" policies. Nonetheless, prices rose steadily during that period. An NBS survey found that in the past decade, housing prices increased at an annual rate of 16.1 percent.

Li Zhanjun, chief researcher with the Beijing China Property Research Association, said policymakers should reflect on the adjustment policies pursued over the past 10 years.

"Policies in the past decade were characterized by curbing supply and demand. But the efforts were not followed up at the local government or industry level," Li said.

Li said, local governments, banks and developers were very innovative in finding ways to circumvent the regulations.

For example, though the central government in March clearly mandated a 20 percent capital gains tax on pre-owned home sales, most local governments, whose fiscal revenue heavily relies on the property market, avoided stipulating measures on the capital gains tax in follow-up announcements.

He Tian said the long-term approach should also include monetary policy and land policy, which offer approaches that are very effective in reining in prices.

A tightening of monetary policy will immediately curb developers' cash flows, while allowing rural land to be traded in the market will greatly ease tight supply conditions.

Property tax, another market-oriented policy, won't really be effective unless it is also levied on houses held in inventory. But that seems unlikely in the near future, according to He.

Some recent signs also point to the formation of the market-oriented mechanism. A series of articles published by the Xinhua News Agency called for a lifting of the ban on property developers' normal financing activities.

In April 2010, the State Council ordered the China Securities Regulatory Commission to suspend approvals for listing, refinancing and major-asset restructuring proposals by developers holding idle land plots or participating in housing speculation.