China’s home prices will decline later this year, with sales volume already falling following purchase restrictions by local governments, said Li Daokui, an adviser to the People’s Bank of China.

A 5 percent to 10 percent drop in home prices will be a “significant achievement,” he said in Beijing today. Cities such as Chengdu in the southwestern Sichuan province should be able to remove restrictions in a year and a half because home prices aren’t as high as those in Beijing or Shanghai, he said.

Premier Wen Jiabao said over the weekend that China will “resolutely” press ahead with controls on the property market to curb speculation, reiterating a pledge to keep housing affordable. The government will “severely punish” irregularities in the real-estate market, implement differentiated credit and tax policies, and hold local officials accountable for maintaining stable home prices, he said.

China is seeking to contain gains in housing prices after they climbed for a 19th month in December. The government extended curbs in January, including raising the minimum down- payment for second-home purchases, telling local governments to set price targets on new properties, and introducing taxes for homes in Shanghai and Chongqing. The central bank also raised interest rates for the first time in three years.

China should slowly raise interest rates, Li said, though the higher borrowing costs shouldn’t be used as the only tool to tame inflation. Higher prices are caused by rising global costs of raw materials, domestic agriculture and wages, he said.

‘Unreasonable’ Demand
China’s rising property market in the past few years was driven in part by “unreasonable” demand from speculators, Qi Ji, Vice Minister of Housing and Urban-Rural Development, said in Beijing yesterday, adding that government curbs have been targeted at that group of buyers.

January new home prices increased in all but two of the 70 Chinese cities monitored by the government. The national statistics bureau is scheduled to report February’s housing data on March 18. China’s home prices rose 0.5 percent in February, the slowest monthly gain since August, as the government expanded residential curbs, SouFun Holdings Ltd. said.

Demand from speculators have left homes in cities such as Beijing vacant after they are bought, which are “crazy investments,” Li said.

Sharp Price Drop
Vincent Lo, chairman of Shanghai-based Shui On Land Ltd., said on March 6 that he expects home sales in China will fall “sharply” this year because of curbs, while China Vanke Co., the nation’s largest publicly traded developer, said this week the outlook for demand for its homes will withstand government measures. Poly Real Estate Group Co., the second-biggest, said last week the measures didn’t change its bullish outlook in the medium to long term.

The gauge tracking property stocks on the Shanghai Composite Index fell 0.1 percent at the 3 p.m. close, the least among five industry groups on the benchmark measure. The Shanghai Composite lost 1.5 percent.

China will also build 36 million units of social housing or affordable homes in the next five years, aiming 20 percent coverage of the market. That includes 10 million units each in this year and next, the country’s top planning agency National Development and Reform Committee said on March 6.

The introduction of social housing will help control home prices, Li said.

The nation’s target for affordable housing will have a major impact on the residential market because these units will account for half of the market share, Pan Shiyi, chairman of Soho China Ltd., the biggest developer in Beijing’s central business district, said on a conference call last week.

–Bonnie Cao, with assistance from Kevin Hamlin in Beijing. Editors: Linus Chua, Chua Kong Ho