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Knight Frank and China-based consultancy Holdways reports new home prices fell in China by 6% as compared to the peak in 2011, although it is noted that the previous peak marked a 90% rebound from the market’s last low point seen in 2009. Market speculators note that large development firms may have much to do with it as they strategize to lower prices in an effort to increase sales volume. Meanwhile, the Chinese government says it will maintain price controls and mainland banks continue to offer differentiated loan products that include a discount for first-time homebuyers. Of the 20 cities surveyed, Shanghai showed the highest prices after the drop. For more on this continue reading the following article from Property Wire.

New home prices in 20 major Chinese cities fell 6% in the first quarter of 2012 compared with their last peak in the third quarter of 2011, according to the latest property report from Knight Frank and China based property consultancy Holdways.

However, this previous peak represented a 90% rebound from their last trough in the first quarter of 2009, the report points out.

In the first quarter of 2012, primary sales of housing across 20 major cities in China continued to fall, during the traditional slow season of the Spring Festival. Prices of primary homes dropped a further 3.8% quarter on quarter, taking into account differences in property type, location, fittings and whether they were presale or completed units.

The wait and see attitude which prevailed during the Spring Festival is likely to keep the primary housing market subdued, the report says. The total area transacted in the 20 major cities fell 1.8% quarter on quarter, representing a decrease of 27% year on year.

Some 12 of the 20 cities registered quarter on quarter declines in transacted area. Among these cities, Dalian was down 55.5%, Shenyang down 46.1% and Beijing down 27.4%.

However, inventory of primary homes in the cities decreased 4.1% quarter on quarter, as many developers, including leading firms such as Merchants, Evergrande and Shimao, adopted a successful strategy of lowering prices to achieve higher sales volumes. Subsequently, there were quarter on quarter declines in the adjusted prices of primary housing market in 18 out of the 20 cities, with the only exceptions being Tianjin and Ningbo. Taiyuan and Shanghai registered the largest falls in price levels with respective declines of 8.5% and 8.1%.

Premier Wen Jiabao has reiterated his determination to keep controls on the real estate market in place. A series of policy adjustments to ease the restrictions on housing purchases by the Shanghai government and the Wuhu government of Anhui Province have been suspended. However, despite the control measures, mainland banks are offering a differentiated credit policy which reinstates a discount on interest rates for first home loans.

The report says that China’s housing sector is not expected to rebound during the second quarter of 2012 and inventory levels are likely to stay high. ‘Developers will face huge funding pressure if residential sales remain poor and banks maintain their credit tightening policies,’ it says.

‘Although they may opt to borrow from other funding sources, the costs will be higher. More developers are likely to try to recover funds by lowering prices, while others may be forced to transfer the ownership of their projects in order to lower their debt ratios,’ it explains.

‘We expect to see more mergers and acquisitions among small and medium sized developers during the second half of the year, while those developers which are not well managed may go bankrupt, liquidate or cease business.

‘Meanwhile, a housing property tax may be introduced on a trial basis in more cities to help achieve a tighter control on the market. The government’s policy on the real estate market is unlikely to undergo any major relaxation until the leadership handover of central government is complete, unless there are significant changes in the external economic environment. However we could see some fine tuning on certain policies,’ it points out.

During the first quarter of 2012, the average price of urban, primary residential property was the highest in Shanghai, followed by Beijing and Guangzhou. Among the 20 cities, only Ningpo, Wuhan, Shenyang and Chongqing witnessed quarterly increases in average prices ranging from 1.5% to 11.1%.

The average price of suburban, primary residential property was the highest in Shanghai, followed by Beijing and Hangzhou. Among these cities, only Wuhan, Shenyang and Chongqing witnessed quarterly increases in average prices ranging from 0.9% to 10%.

The average price of city wide, primary residential property was the highest in Shanghai, followed by Beijing and Shenzhen.  Among the 20 cities, only Shanghai, Dalian, Wuhan, Shenyang and Chongqing witnessed quarterly increases in average prices ranging from 0.4% to 7.8%.

Primary residential inventory in 20 major cities dropped 4.1% quarter on quarter, although it was up 35.7% year on year. Primary residential property prices are expected to fall in most Chinese cities in the second quarter, except in Beijing, Shanghai, Chengdu and Wuhan.

This article was republished with permission from Property Wire.