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China rate cut will help steady ailing property market, but not spark recovery

[HONG KONG] China's second interest rate cut in just over three months will boost property sales and help stabilise weak house prices, but a strong recovery in the sector is unlikely given a glut of unsold homes, market watchers said on Monday.

The property industry accounts for some 15 per cent of China's gross domestic product, so signs of a bottoming out in the sector would be good news for the government and central bank after economic growth slowed to a 24-year low last year.

China's central bank cut interest rates on Saturday, in the latest effort to support the world's second-largest economy and ward off deflation. The move followed an earlier decrease in November and reductions in mortgage rates and downpayment levels for some home buyers in September.

Home prices fell again in February from January, but the pace of declines has slowed, suggesting Beijing's loosening efforts may be starting to bear fruit, two private surveys showed on Monday.

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The total 65-basis-point reduction in mortgage rates after the two policy rate cuts is equivalent to a 4.1 per cent price cut for a home valued at 1 million yuan (US$159,411), according to Barclays Capital. That follows a 4.5 per cent drop in home prices in 2014.

Sharply lower funding costs will help tempt would-be home buyers who are still waiting on the sidelines, said China Real Estate Index System (CREIS), a consultancy linked to China's largest property data provider Soufun Holdings. "A loosening monetary policy is definitely positive to the market sentiment; a cyclical rebound in sales this year shouldn't be a problem," said Rosealea Yao, an analyst at Gavekal Dragonomics based in Beijing.

She expected China's home sales growth to turn positive on a yearly basis in April, but said property investment would continue to shrink due to high inventory levels. "The housing inventory has only dropped little, despite a narrowing sales fall. It may take until next year for inventory to return to a normal level." Inventories in the upper-tier cities fell in February as developers launched fewer new projects ahead of the Lunar New Year holidays, according to researcher Real Estate Information Corporation (CRIC), owned by E-House China Holdings Ltd.

But the time needed to work off the supply overhang in most of these cities is still much longer than a year ago, with inventories in Beijing and Shanghai up 42 per cent and 66 per cent, respectively.

Property sales hit the highest level of 2014 in December, calculations from official data showed.

The property downturn is seen as one of the biggest risks facing the economy this year, along with high levels of corporate and local government debt and rising deflationary pressures.

Shares China's property sub-index edged up 0.3 per cent on Monday following Saturday's rate cut. It has surged nearly 70 per cent since late October on hopes that Beijing will roll out more stimulus measures.

The government is due to publish its January and February property sales and investment data on March 11.