Ratings agency Standard & Poor's (S&P) said Monday that home prices in major mainland cities may drop by 10 percent over the next six to 12 months due to the Central Government's efforts to avoid a property bubble.

The projected price corrections will be led largely by uncertainty over the measures that the government may take to cool the market and the abundance of new properties up for sale, S&P told reporters during a media teleconference.

"As the government tightening measures have started to have a negative impact on the property market, we expect such corrections to deepen in the next six to 12 months," said Bei Fu, director of corporate ratings at S&P.

Average home prices in first-tier mainland cities, such as Beijing, Shanghai, Guangzhou and Shenzhen, have fallen about 10 percent as of the end of August from its April peak when the government introduced tightening measures that had an immediate effect, said Fu.

After homes sales started to rebound both in terms of price and volume since July, the Central Government in late September further banned lending to third home buyers and raised the minimum down-payment ratio for first-time home buyers to 30 percent. It also said it plans to extend property taxes throughout the country.

Many developers, according to Fu, have adequate liquidity and have already locked in the majority of their revenue for the year.

Fu also said he believes developers are in a healthier position compared with the 2008 downturn when home prices slumped almost 30 percent in less than nine months.

"The correction this time is going to be moderate, and will be in a kind of gradual downward adjustment," Fu said, adding that if the economy slows down significantly and interest rates rise sharply, then prices may even tumble 20 percent.

Nicole Wong, regional head of property research at investment bank CLSA agrees that the mainland developers are in better shape compared with two years ago.

However, Wong doesn't believe that the property market is going to slow. In fact, she thinks it is set to maintain its upward momentum.

"Home prices came down about 5 percent after April's tightening measures but have basically bounced back to their previous peak," Wong said. "Transactions in many major cities also outpaced market expectations during 'Golden Week', despite more cooling measures taken by the government".

Amid loan and purchase restriction measures, official data shows new home transactions in Shenzhen during October 1 - 6 increased 3.5 times on a year-on-year basis. Average new property transactions exceeded 600 units every day in the first four days, the highest this year.

Likewise, home sales in Beijing also increased during the holiday. The number of deals brokered in the first five days reached 691 - almost double that of last year, according to a report in the Beijing Morning Post.

Wong also disagreed with S&P's findings that property prices are set to fall.

"After the price correction in 2008, developers have become more cautious," said Wong. "They slowed down property construction since mid-2009 and further cut land purchases from April after the tightening measures. So, current home supply is not abundant."

"I expect mainland home prices to rise another 10 percent over the next year," she added.

China Daily

(HK Edition 10/12/2010 page2)