Chinese Property Market Could Get Heated Up, after Interest Rate Cut

Though instigated in an attempt to bolster a slowing economy, the central bank's unexpected cut in interest rates has reinforced fears that the property market — which the Chinese government has been trying to contain — may again overheat.

The People's Bank of China announced late Thursday that it would cut the benchmark interest rate for one-year deposits by 25 basis points and that of one-year lending by 31 basis points Friday.

It was the central bank's second interest rate cut in two months, with the moves apparently designed to stimulate borrowing as the world's second-largest economy is expected to have slowed further in the second quarter of 2012.

However, the cut will also bring down the cost of buying homes and, more importantly, boost confidence in the property market, sparking fears that the sluggish market will rebound and thereby lay waste to government efforts to return house prices to "reasonable levels" for ordinary Chinese.

There have already been signs of a warming property market as the average home price in 100 major cities edged up 0.05% in June from a month ago, ending a nine-month decline, according to data released by the China Index Academy earlier this week.

Sales of new homes in Shanghai jumped to 1.02 million square meters in June, up 26.6% from May. Several real estate agencies also estimated that sales of second-hand homes in June may even have increased by around 40% from a month earlier to top 17,000 homes.

In Beijing, home sales rose to 25,602 homes in June, 10.5% more than in May and 50.6% more than the June 2011 level, according to the municipal commission of housing and urban-rural development.

The central bank cut benchmark interest rates in early June, the first such move since the global economic crisis in 2008, a move that many believe helped the price rise in June.

The loosening monetary policy helped encourage first-time buyers to purchase and more people who intend to move into bigger homes will be the next ones to boost the market, said Li Pingke, an analyst with Guotai Junan Securities.

The confidence index for home buyers in the second quarter rose to 55.2 points, up 2.6 points from the first quarter, according to a report from the Shenzhen World Union Properties Constancy Co.

The report said that over 40% of surveyed people believe home prices will rise, the first time in a year that people expecting a rise outnumber those expecting a decline.

However, many doubt that the warming will develop into a complete rebound as the government has vowed several times to not relax property controls. The property curbs will continue to shut out speculative demand, which means that the current price rise trend lacks potential to carry on, said Chen Long, an researcher with fdc.com.cn, a Wuhan-based real estate website.

The current rebound in the home market mainly relies on first-time buyers, which will weaken as time goes by. Sales may drop in the latter half of the third quarter, believes Hu Jinghui, deputy president of 5i5j, a major real estate service company.

Courtesy: www.watchchinatimes.com