According to media reports, during the first half month since the new policy on home loans was released, market sentiment in the property sector has undergone a sea change with more prospective buyers displaying renewed interest in residential property projects. [Note: To lift a sagging property market, the People's Bank of China and the China Banking Regulatory Commission relaxed lending rules for home buyers on September 30, allowing banks to offer a maximum 30-percent discount to first-time home buyers, a group that has been expanded to include those who already own one property but have paid off their mortgage.]

However, with a glut of unsold and unoccupied homes and buyers who are more rational, the effects of the removal of housing purchase curbs or loosening of lending rules shouldn't be overestimated. China's property sector is unlikely to experience a quick recovery and will undergo a long-term adjustment.

It remains to be seen how much demand can be unleashed by the new lending policy. In September, the consumer price index (CPI), a main gauge of inflation, increased 1.6 percent year on year, the lowest level since February 2012. As of the end of that month, M2, a broad measure of money supply that covers cash in circulation and all deposits, increased 12.9 percent year on year, down 0.7 percentage points from the end of last year.

Against the backdrop of easing inflation and slowing growth in money supply, fewer people feel the need to buy a home to offset the inflation with the exception of those who wish to upgrade their homes. In addition, commercial banks are unlikely to offer large discounts on home loans due to rising costs of funding.

People have become more rational when it comes to investing in China's housing market. This round of housing adjustment has been caused by market forces. Having experienced a continuous price rise over the past decade, especially the surge in the first half of 2013, home prices in China had already risen too high.

With a large number of people's living conditions having been greatly improved, market demand is naturally shrinking, which has caused price falls since the last quarter of 2013. Market expectations have changed from price increases to a divergence in opinions and then to price declines, which has helped dampen speculative activities in the property sector.

Getting rid of the large inventory will be the new dominant theme of China's property market. By the end of September, the floor space of unsold new homes had reached 377 million square meters, up 28.5 percent year on year. From January to September, the floor space of housing projects under construction increased 8.1 percent year on year while sales of new homes declined 10.3 percent.

In the future, the mismatch between supply and demand will become even more severe. According to data from the Shanghai-based E-House Real Estate Research Institute, among 35 cities surveyed, the floor space of unsold new homes stood at 38 million square meters in first-tier cities, 201 million square meters in second-tier cities and 41 million square meters in third-tier cities, up 8.8 percent, 3.5 percent and 2.2 percent year on year, respectively. Inventory has increased month on month in first-tier cities for eight consecutive months and growth accelerated in September. The removal of curbs on purchasing and the loosening of lending rules may boost the market in the short run. But in the long run, potential buyers' expectations for price declines will temper any continuous rebound in demand.

In a nutshell, a stunning recovery is unlikely to occur in China's housing market, even after the removal of purchasing curbs and lending restrictions. A rational market sentiment will persist in the property sector in years to come. Property developers would do well to seize the golden opportunity presented by those new policies by offering discounts to buyers in a bid to boost sales.

In 2013, home prices and sales both surged. This won't be seen in the future. China's property sector has entered a new period of long-term adjustment. Transformation of the growth pattern and economic restructuring won't back up another dramatic rise in housing prices. The time has come for local governments and developers to embrace the "new normal."

This is an edited excerpt from an article by Xiang Zheng, a financial commentator, published in Economic Information Daily