The downward pressure on China's home prices will gradually ease through the rest of the year as house sales rise and developers manage to lower inventory levels, rating agency Moody's predicted in its latest industry report.
In its monthly China property newsletter, Moody's said residential home prices continued to recover in July in China's 70 biggest cities. The pace of price declines on a month-on-month basis moderated, with 29 of the 70 cities reporting falls in July, down from 34 in June.
Tier-one cities -- Beijing, Shanghai, Guangzhou and Shenzhen -- are leading the price recovery. Three of them posted year-on-year price growth in July, with Beijing registering a gain of 1.2 percent, Shanghai 3.6 percent and Shenzhen a very strong 24 percent.
Although overall inventory levels remain high, both tier-one and sample tier-two cities, such as Hangzhou and Xiamen, registered lower supplies of residential properties last month compared with June, Moody's said.
The continued decline in new starts and total land transactions in terms of floor area should help slow housing supply and inventory growth. Cumulative national residential new starts in the first seven months of 2015 posted a 17.9-percent year-on-year decline, compared with a 17.3-percent fall in the first half.
The pick-up in sales, according to Moody's, is the result of support monetary implemented by China since the second half of last year.
These favorable policies, including increased availability of mortgages, as well as lower down-payments and funding costs for buyers financing their second homes with bank mortgages, will support sales over the next 12 months and help maintain healthy growth in the second half of 2015, it said.
"While overall nationwide inventory levels have remained high, both tier-one and sample tier-two cities continued destocking in July 2015," said Franco Leung, a Moody's vice president and senior analyst.
"Accordingly, we expect to see a continued easing in home price pressures through 2015, as developers manage down inventory levels."
Moody's also warned that the depreciation of the Chinese currency yuan that has followed the shift in the mechanism for determining the daily fixing rate of the yuan against the U.S. dollar will challenge Chinese property developers, given their significant exposure to foreign-currency debt, the majority of which is denominated in the U.S. dollar.
Nevertheless, the agency expects the majority of its rated developers to withstand up to a 10-percent depreciation of the yuan relative to foreign currencies without it impacting their credit ratings.
Furthermore, it is possible that other factors could counterbalance the impact of a currency depreciation, including the potential for further declines in domestic interest rates and the ongoing opening up of the domestic bond market as a funding avenue, it added.