Policy controls drive property demand to small cities

The resilience of home sales in China (up 18% y/y in June) has raised questions about the effectiveness of government efforts to cool the sector, which have been stepped up in recent months. In fact, they seem to have been performing well. The major controls are curbs on purchases in large (tier 1 and 2) cities, and sales in these places have started to fall. But officials have been more relaxed about purchases in smaller (tier 3 and 4) cities since this is where much of the overhang of unsold property can be found. It is sales in these places that are driving the headline figures. (See Chart.) Still, the recent rate of sales growth is unsustainable and, with mortgage lending now slowing, it is likely to drop back soon.