China's new homes market was subdued in the fourth quarter of 2011 due in part to the government's home-purchase restrictions and a wait-and-see attitude adopted by potential buyers. 

According to Knight Frank's latest China Residential Market Watch adjusted new home prices fell 2.3% quarter-on-quarter. This represents the first fall since the first quarter of 2009.

The total transacted area of new-build property in 20 of China's major cites dropped 6.4% quarter-on-quarter, and a significant 45.4% year-on-year. 

Only the cities of Haikou and Jinan registered year-on-year growth in their total transacted area, while others among the 20 major cities witnessed drops of 20-73%, with Shanghai, Chongqing, Hangzhou, Suzhou, Tianjin and Dalian recording falls of over 50%. 

Adjusted primary residential prices in over half of the 20 major cities showed quarter-on-quarter drops. However, only four cities (Hangzhou, Wuxi, Chongqing and Xiamen) registered price reductions compared to the same period in 2010. 

Thomas Lam Ho Man, Head of Research at Knight Frank in Greater China "We expect that increasing supply and funding pressure will force more developers to cut prices to promote sales, but the sentiment in China's residential market is likely to remain weak in 2012." 

China's Central Economic Work Conference, an event that indicates the direction of Mainland economic policies over the coming year, was held in early December 2011. During the conference, the central government announced that it would "maintain its property-tightening policies, promote the return of home prices to reasonable levels and promote the healthy development of the property market."

Meanwhile, local governments-including Beijing, Shanghai, Guangzhou, Shenzhen, Fuzhou, Haikou and Xiamen-also announced that austerity measures, including home-purchase restrictions, would be maintained throughout 2012. 

Property tax may be extended to other cities from Shanghai and Chongqing, which could further regulate and promote healthy development of the market. However, given the importance of the property industry to the local economy, we expect a number of cities may fine-tune current policies to encourage demand from owner-occupiers. 

To read the full report please click here

To read Knight Frank's Asian Property Outlook for 2012 please click here