Foundations of Chinese property still shaky

BEIJING (Reuters) - The slide in China's property market will not end any time soon despite new policies to encourage home purchases, and Beijing may have to come up with more support, industry experts say.

The potential for China's eight-year housing boom to fizzle out, or turn to bust like the stock market, is a major concern, with the country already on course for its first year of single-digit economic growth since 2002.

To breathe life back into the property sector, the government this week cut taxes, mortgage rates and down payments to make it easier for residents to buy their first homes.

China's housing market has faltered since late 2007 with transactions diving, forcing developers to cut prices in major cities such as Shenzhen by up to 40 percent. Nationwide prices are still rising but at a much slower pace than last year.

"The wait-and-see sentiment will not end in the near term," said Edmund Ho, DTZ's managing director for North China.

It is still too early to predict a recovery, added Chen Liang at B.A. Consulting, a real estate service company, in Beijing.

"A more important question is still how the government, developers and service firms should work together to deal with the sluggish market," he said.

The risk of a property meltdown could severely affect growth in the world's fourth-largest economy.

The banking system in China is much more insulated from a housing market deterioration than the United States; only 19 percent of total bank loans are to the real estate sector compared with more than 50 percent in the United States, Standard Chartered analysts said in a note.

However, they said the impact on the overall economy could be substantial, with roughly 10 percent of China's GDP directly affected by the real estate sector and the potential indirect losses much bigger.

The weakening economy, which slowed to 9.0 percent in the third quarter from 11.9 percent in all of 2007, has dampened people's income expectations and fueled uncertainties about future property prices.

Even before the economy lost its sizzle, many in China thought that housing prices were unreasonably high, unaffordable for most and a risky investment for those with money to spare.

CHANGING COURSE

Beijing's support for the property sector marks an about-turn from the restraint it tried to impose last year, when the dominant concern was that the market was swelling into a bubble.

Although home buyers were the main beneficiaries of the latest policy relaxation, the government also endorsed steps taken by more than a dozen cities such as Shanghai, Hangzhou and Nanjing, which included cuts or postponement of taxes and fees levied on developers.

This week's "measures represent the government reversing its anti-property stance adopted one year ago," Andy Rothman, CLSA's China macro strategist in Shanghai, wrote in a note to clients.

"The government is saying, (my words), 'we encourage homebuying and you should anticipate that property prices will start rising again'."

Rothman forecast that the new measures could translate into a significant pick-up in sales by early next year and a rebound in prices across most of the country.

Anticipating such gains, property stocks performed well the day after the new measures were announced. Shares in Vanke, China's largest residential developer, ended up more than 4 percent on Thursday, while the country's benchmark index fell 1.1 percent.

TOUGH TIMES AHEAD

But several analysts said the policy shift was rather small and that Beijing would need to follow up with more measures, such as giving people greater freedom to buy second homes.

"If the new policy does not achieve any significant results, it's possible further measures will come out," said Sun Jianping, an analyst at Guotai & Junan Securities in Shanghai.

Nothing will change overnight, said Li Yongchang, deputy head of Shanghai Pudong Development Bank's Beijing branch.

"We will wait and see for the time being and take a cautious attitude," he said, noting that the U.S. subprime meltdown offered a warning to China.

His views were echoed by Liu Jianjun, head of retail banking at China Merchants Bank, who said that his bank would remain cautious about approving mortgages.

"We will not lower our threshold. Why ease? We will still turn down applicants who are unqualified," Liu said. "We will stay cautious because the market is changing and the economy is entering a correction cycle."

Annual growth in China's urban disposable income slowed to 7.5 percent on average after inflation in the first three quarters of this year, down from 12.2 percent in 2007.

The average Beijinger's income was 21,989 yuan ($3,216) last year -- not enough to buy even two square metres of a typical apartment within seven km (4.5 miles) of the city center.

With such a striking disjuncture between income levels and property prices, most analysts say there is still room for housing prices to fall.

"The market will go through a very tough period at the end of this year or even till early next year," DTZ's Ho said.

($1=6.835 Yuan)

(Reporting by Langi Chiang; Editing by Simon Rabinovitch and Jacqueline Wong)