With no letup in credit tightening on real estate and mortgage loans, demand from property speculators has been subdued of late in the mainland property market, helping to take some of the steam off the sizzling real estate market.

According to the latest monthly statistics released by the National Bureau of Statistics, the mainland property market is showing sings of cooling. Residential property prices declined in 14 out of 70 cities in July, with home prices in first-tier cities for the most part unchanged.

Meanwhile, the prices of recently-built homes rose month-on-month in July in 39 out of 70 medium-sized and large cities, down from 44 cities in June while home prices in the largest cities including Beijing, Shanghai, Shenzhen and Guangzhou remained stable.

These figures suggest that the central government's "New Eight Policies" initiative, which is aimed at cooling the red-hot real estate market, is working.

However, some macro factors still support an extension of purchase restrictions as demand for residential property is still high. Although property transactions are relatively low now compared with previous months, first-tier cities are still experiencing week-on-week growth in sales volume.

Furthermore, some second and third-tier cities saw a price surge as speculators turned their sights to cities not covered by home purchase restriction orders. And on the macro side, fixed-asset investment for real estate rose 4.7 percent month-on-month in July.

As a result, I believe it will not be long before purchase restrictions are extended to these previously untouched cities. Further tightening is expected in cities that saw price hikes in the first half of this year, including Chengdu and Qingdao.

On the liquidity front, I anticipate low liquidity in the property market, given the reluctance of banks to extend loans to mortgage and property development activities.

Figures compiled by CCBI indicated that new loans fell 22.3 percent month-on-month in July, reflecting the tight credit conditions for the real estate sector. As no liquidity relief is foreseen for the sector, I expect speculators to back out and home prices to fall in the second half.

As property purchase restrictions are threatening to extend to second and third-tier cities, investors are well advised to reduce their weighting in the property sector.

Against this background, defensive developers with limited exposure to purchasing restrictions and that focus on commercial property development are preferred.

The author is an associate director and economist at CCBI. The opinions expressed here are entirely his own.

(HK Edition 08/31/2011 page2)