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China's sizzling housing market is cooling off

July 12, 2010 |  8:30 pm

China’s aggressive new regulations aimed at cooling off the nation’s real estate market have led to the first decline in housing prices in 16 months, government data released Monday showed.

An index of urban residential property prices in 70 mid-to-large-sized cities fell 0.1% in June compared with May, marking the first month-to-month drop since February 2009. Many buyers have been sidelined since the central government increased down payment requirements and tightened mortgage lending in April.

The regulations were meant to crack down on speculators who have been blamed for inflating real estate values in many of China’s leading cities. But with the economy showing signs of slowing, analysts said policymakers must be careful not to over-correct and stunt China's recovery. Real estate was one of the chief drivers of economic growth last year.

Meanwhile, housing starts continue to rise at a brisk pace. Investment in residential buildings in June was up 31.3% compared with the same month last year.

“Supply continues to increase at a robust pace,” Alaistair Chan, an economist for Moody’s, wrote in a research note. “A persistent gap between supply and demand hence could develop. This would result in a large drop in prices, which the government will seek to avoid.”

But in a sign the government will remain tough on speculators, the Ministry of Housing and Urban-Rural Development released a statement on its website Monday saying: "We will urge local governments to make sure that they strictly implement the … housing loans policy to crack down on housing speculations.”

 -- David Pierson in Beijing