OREANDA-NEWS. Fitch Ratings says today that the Chinese government's recent steps to lower down payment rates for second home purchases will not meaningfully stimulate demand, which has been muted because buyers are delaying purchases due to subdued expectations for price increases.

Home purchase restriction policies introduced at the start of 2012 and the sharp increase in supply from 2013 have successfully dampened investment demand for homes. In the resulting environment of falling prices or slowing price increases, investment-driven buyers have been generally delaying their purchases. Demand is driven more by fundamental housing needs from first-time home buyers or upgraders, which Fitch expects will increase consistently but slowly.

The lowering of down payment rates to 40% from 60% on purchases of second homes - effective 31 March 2015 - will only stimulate genuine demand from upgraders, and will not adequately address the excess supply of homes aimed at first-time homebuyers in the lower tier cities. Furthermore, home upgrade demand is stronger in the more economically established and wealthier Tier-1 and Tier-2 cities, but these markets are also the ones that need additional stimulus the least.

The weakest markets for the Chinese housing sector - mainly the regions outside southern China and the Tier-1 cities - will not see immediate benefits from this policy change as homebuyers' purchase habits will only change when supply becomes tighter and expectations of price increases rise. This may only begin to happen in the next 12 to 18 months as the impact from slower development from 2014 is felt. Even then, it may take until 2016 for the market to absorb the excess inventory from the 2013 supply boom. This is because construction of most of the homes that started in 2013 will be completed in the beginning of 2015 and the properties delivered to owners then.