"Policy targets with respect to the property market are still some way from being reached," Liao said at a press briefing in Shanghai today. "The adjustment of the market is set to continue into 2009."

China's government is seeking to rein in soaring property prices to help slow inflation from an 11-year high. It raised interest rates on mortgages for second homes and increased the minimum down payment to 40 percent of sale price in September.

The central bank told commercial banks to further tighten mortgage lending in December. Under new rules, loan applications for the purchase of a second apartment are counted by household instead of by individual.

Housing sales in China fell 0.4 percent to 136.6 million square meters in the first four months of 2008 from a year earlier, according to the National Development and Reform Commission. Home prices in 70 major cities rose 9.2 percent in May, the smallest gain in eight months.

First-tier cities including Shenzhen, Beijing, Guangzhou and Shanghai will face more downward pressure on prices than smaller cities because of oversupply, according to Liao.

The economist said he expects home prices to fall a further 10 to 15 percent in Shenzhen, where average prices had already dropped 36.5 percent between October and May. Prices in Beijing and Shanghai are likely to fall 10 percent over 12 months.

Vanke sales drop

China Vanke Co., the country's largest publicly traded real estate developer, said yesterday apartment sales fell 22.8 percent in June from a year earlier.

Falling home prices in Shenzhen and Beijing have raised concerns an asset-bubble burst may leave China's banks with more non-performing loans. The banking regulator warned lenders in May against a potential rebound in bad loans amid tighter credit controls and rising inflation.

Property-related lending gained 30 percent annually in the past two years in China, twice as much as overall loan growth, according to Moody's Investors Service. Some builders evaded lending controls by indirectly accessing bank financing, it said.

The People's Bank of China and government ministries held talks on stabilizing real estate prices, and may make financing easier, the Beijing-based Economic Observer reported on July 5, citing a person it didn't identify.

A decline in property prices will erode demand and disrupt economic growth, the newspaper said, citing a National Development and Reform Commission report.

Liao said today he doesn't expect the government to relax rules on real estate financing soon.

"With excess liquidity still prevailing, the government would be concerned that an early relaxation of tightening measures would result in an undesired quick rebound in the market, negating the previous tightening efforts," Liao said.

Source: Bloomberg