CHINA - Rating agency Moody's has confirmed its negative outlook for the Chinese property sector over the next 18 months, pointing to downward pressure on property prices and tightening bank credit.

Government measures aimed at cooling the property market are unlikely to be relaxed next year, according to the report.

Price declines as a result of previous cooling measures only emerged in the fourth quarter, and the lag between implementation and impact could deter the government from relaxing regulation and the availability of bank credit in the short term.

The report said: "Property developers in China will continue to face a challenging operating environment of the near term, marked by slowing sales, downward pressure on property prices and profit margins against the backdrop of the government's continuing tight controls over home purchases, price growth and bank credit."

According to the Moody's analysts' assumptions, sales in first-tier and major second-tier cities will fall by 25-30% next year, while those in smaller and peripheral cities will fall by around 5%.

"A large decline in sales is not foreseen, as there is still strong underlying demand in the cities, which benefit from urbanisation and lower levels of property speculation," the report said.

In a separate note, Knight Frank forecast that residential prices in mainland China and Hong Kong would drop by 10-15% in 2012.

Predicting a "mild correction" overall, the property firm forecast outperformance at the top end of the market as a result of limited supply, with prices for these assets expected to decline by 10% or less.
According to Beijing Holdways, a consultancy that worked with Knight Frank on the report, price adjustments already evident in first-tier cities are beginning to spread to second-tier cities.

But its consultants believe the government is likely to loosen some of the measures already implemented if prices decline more than 20% next year.

During China's last downturn in 2008, property prices across the country fell by 19%.