SHANGHAI: Rising inventory relative to demand and new curbs on lending will force developers to cut home prices on the mainland from the third quarter, according to a report by international property consultant Knight Frank.

The supply of new homes in 10 major cities surveyed would continue to rise, it said. Even though activity showed signs of picking up last month, overall transaction levels remain relatively low.

Meanwhile, concerns are mounting over limits on bank lending. The central government raised reserve ratios — the proportion of deposits financial institutions must hold as capital rather than lend out — twice in quick succession, on May 18 and then again on 20 June. The ratio has now been raised six times in the course of a year, to a record-high 21.5%.

This had "the effect of tightening developers' credit", Knight Frank said.

On the subject of increasing inventory levels, the report said it would take about 11 months for the market to absorb all available inventory in the 10 cities, assuming sales rates remains the same as the average over the last three months.

"We believe rising inventory and funding pressure will suppress home prices from the third quarter," it said.

Last month, sales of new homes in the 10 major cities, including Beijing, Guangzhou, Shanghai and Shenzhen, rebounded from the previous month but were still relatively low.

Meanwhile, new-home prices, adjusted for differences in property type, location, fittings and other factors, edged up a marginal 0.7% month-on-month.

Data collated from 35 mainland cities by Knight Frank and mainland-based property consultant Holdways shows that in May, year-on-year sales volumes were down in most cities, with Chongqing (down 43.6%), Tianjin (down 26.1%), Chengdu (down 24.4%), and Beijing (down 23.8%) experiencing the biggest declines.

The slight rebound in sales was due to increased supply and lower prices in some cities. Month-on-month price drops were the sharpest in Shenzhen (down 7.1%), and Tianjin (down 1.9%), while at the same time, there was a record month-on-month increase in the floor space sold in these two cities — reflecting, the report said, the power of price reductions in promoting new-home sales.

However, sharp and widespread falls in prices are not on the cards. "In the short term, price cuts are not expected to figure prominently... given that developers' financial strength has not deteriorated markedly," Knight Frank said. — SCMP

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