Following a string of measures it enacted last autumn to encourage home purchases, the State Council on December 20 formally started to require property developers to adapt to the changing market and boost home sales at reasonable prices as part of its guidelines to promote the sound development of the real estate market. At the same time, local governments were granted the authority to design their own policies and measures to stabilize their property markets.

Analysts applauded the Central Govern-ment's decision to grant such power to the local governments, because property markets have developed unevenly in different regions in the country. The Central Government had previously adopted a more stringent management policy for property markets nationwide to curb real estate speculation in 2005 when housing prices rose rapidly in Shanghai. This move was later criticized as "offering the whole country pills because Shanghai caught a fever."

But some real estate analysts doubt whether local officials, given such freedom to maneuver, will be capable of making sound decisions about the property market or have the political wisdom to balance the interests of all involved parties.

Hu Shuli, founder and Managing Editor of Caijing Magazine, said in a recent article that this "visible hand" of government involvement must "behave with restraint." The government should "give the market time and space to heal itself" during the adjustment period in its normal cycle, because "a reasonable adjustment will squeeze out the bubble and reduce financial risks."

While more cities nationwide have joined those in the rich coastal region to work out their own measures to boost residential property sales, leaders of cities such as Beijing, Shenzhen and Guangzhou have rejected the temptation to intervene, saying housing prices are still much higher than what urban residents can afford.

"We will not support high housing prices in Beijing," said Beijing Mayor Guo Jinlong on January 13 during a municipal conference, according to a report in the Beijing News. "But the government is responsible for escalating land costs and surging property loans, which have driven up housing prices in the past years."

Let prices fall

Property developers are under huge pressure to cut prices and sell their current inventories of homes as soon as possible this year, because the government's huge affordable housing investments over the next three years will augment the oversupply and likely lower average home prices, Pan said.

"The property market will regain its confidence only when the transaction volume climbs," he said. "The shrinking transaction volume indicates potential buyers are still unhappy with the prices."

The transaction volume of commercial homes has continued to plummet despite a spike last November prompted by higher sales of government-subsidized homes. Compared with Soho China, which focuses on commercial and office properties in the capital's bustling downtown area, developers of housing projects outside Beijing's Fifth Ring Road are under great pressure to reduce prices because of their lack of cash and the overstock of affordable housing there, Pan said.

The floor area of vacant commercial properties totaled 164 million square meters at the end of December, up 21.8 percent from a year earlier, according to the NBS. Of this floor area, residential homes occupied 90 million square meters, up 32.3 percent year on year.

The skyrocketing housing prices are now too high for typical home buyers. This is the root cause of the current transaction slump in the housing market, Shi said.

"The stagnant real estate market will be revived when home prices tumble to reflect ordinary buyers' purchasing power," he said.

Developers could possibly resort to a fresh round of price competition and scramble for cash at the end of this year when they will need money to pay for land they purchased earlier and pay back bank loans. Many property developers have already made the mistake of spending too much on buying land plots for future development since 2006, Pan said. Property developers nationwide spent more on land purchases in 2007 than the amount of their sales revenue, he added.

"The investors with larger land reserves were courted by more investors before 2007, but huge land reserves have turned out to be a large burden now, signaling more debt and less cash," Pan said. The property market will bottom out when developers who committed major mistakes in the past years go out of business or seek opportunities for mergers and acquisitions or restructure in order to survive, he said. This will also serve as a signal that the industry has gotten back on the right track, Pan added.

Beijing Mayor Guo said the key to solving the real estate industry's current problems is proper market segmentation. Beijing, for example, will cultivate three submarkets-high-end, middle-end and low-end. "While increasing the supply of government-subsidized housing projects for low-income families, we will encourage developers to invest in the middle-end market to build more houses that teachers and doctors can afford," he said.