China’s central bank called on the nation’s biggest lenders to accelerate the granting of mortgages, a sign that developers’ prices cuts and incentives alone won’t boost a slumping housing market and economy.

The People’s Bank of China told 15 banks Tuesday to “improve efficiency of service, give timely approval and distribution of mortgages to qualified buyers,” according to a statement posted on its website. It also urged lenders to give priority to families buying their first homes and strengthen their monitoring of credit risks.

Premier Li Keqiang is seeking to put a floor under a slowdown in the world’s second-largest economy. The housing market has become a drag on growth as developers, facing a surplus of empty units and falling sales, put the brakes on new construction. Home sales fell 18 percent in April from the previous month, according to data from the National Bureau of Statistics.

“China’s property sector has started a correction and that will last this year,” Zhang Zhiwei, Hong Kong-based chief China economist at Nomura Holdings Inc., said. “More investors are more convinced than a couple of months ago that the sector is going downwards.”

The Shanghai Stock Exchange Property Index, which tracks 24 developers listed on the city’s exchange, has declined 4.9 percent this year, making it the second-worst performing group on the benchmark Shanghai Composite Index. The benchmark is down 3.1 percent in 2014. 

Developers scaled back housing starts by 25 percent in the first quarter, the biggest reduction ever, according to Nomura. To lure buyers, China Vanke Co., the nation’s biggest developer by market value, dropped prices in Beijing, Hangzhou and Chengdu by as much as 15 percent since March, according to China Real Estate Information Corp. Vanke and Poly Real Estate Group Co. are allowing buyers to delay making down payments for as long as three years in Changsha, the capital of Hunan province, according to realtor Centaline Group.

The central bank’s request to improve lending efficiency comes as China’s economic slump worsens, with unexpected decelerations in industrial output and investment growth.

Factory production rose 8.7 percent in April from a year earlier, according to the statistics bureau, down from 8.8 percent in March. Fixed-asset investment excluding rural households increased 17.3 percent in the first four months of the year, the slowest for the period since 2001.

For the last four years, China has enacted restrictions to cool its housing market as prices soared. The government increased the minimum down-payment requirement for second homes to 60 percent. The first-tier cities of Beijing, Shanghai, Shenzhen and Guangzhou raised the deposit for second properties to 70 percent last year after prices jumped.

Price increases are moderating this year. They climbed 9.1 percent in April from a year earlier, slowing for a fourth month, according to SouFun Holdings Ltd., the nation’s biggest real estate website.

During the boom years, speculators using shadow financing, or non-bank loans, helped spur the construction of excess housing across China. The surplus now includes more than 10 “ghost cities” haunted by empty apartment blocks in places like northern Ordos, according to SouFun.

More than 10 million homes sit empty in China, and the number could rise to 18 million within two to three years, Nicole Wong, Hong Kong-based head of property research at CLSA Ltd., said on May 12. She cited estimates based on the company’s one-year survey in 12 Chinese cities.

Chinese banks trimmed property lending in the first quarter as authorities kept liquidity tight to curb shadow financing. Mortgage lending expanded 20.1 percent in the period from a year earlier, down from 21 percent at the end of last year, according to data from the PBOC.

“The supply is abundant while demand is the question mark,” Bei Fu, Standard & Poor’s Hong Kong-based property credit analyst, said. “What exacerbates the demand uncertainty is the tightening bank lending.”

Lenders in Beijing and Shenzhen in April imposed a longer mortgage approval process, at least two months in some cases, according to Centaline Group, parent of China’s biggest real-estate brokerage that tracks home lending in 20 cities. Lenders are also charging first-time buyers interest rates 10 percent above the 6.55 percent benchmark of the central bank, ending discounts of as much as 15 percent available before November, according to Centaline.

During the Labor Day holiday on May 1-3, typically a time of robust sales of new homes, they dropped 47 percent in 54 cities to 236,000 square meters from a year earlier, according to Centaline.

To bring buyers back, developers including Shimao Property Holdings Ltd. in Shanghai and Beijing-based Sino-Ocean Land Holdings Ltd. cut prices at more than 40 projects since March. Discounts have spread from smaller cities with a massive oversupply of housing to big cities including Shanghai and Guangzhou, where demand remains strong.

“Developers may increasingly adopt more flexible pricing strategies,” Credit Suisse Group AG analysts led by Hong Kong-based Jinsong Du wrote in an April 28 report. They anticipate deeper and widespread price cuts if sales don’t pick up. 

“I’m pessimistic about China’s property market,” Du said.

At least six smaller Chinese cities since April have started relaxing curbs on home purchases by speculators and investors. Tongling, in the eastern Anhui province, will give tax breaks to first-home buyers for properties smaller than 144 square meters, the city government said May 5 on its website.

Lan Shen, a Beijing-based economist at Standard Chartered Plc, said the central government will have to provide more support for the housing market to recover.

“The PBOC statement probably still won’t give much incentive for commercial banks to make mortgage loans because this part of their business is not very profitable,” he said. “They might shorten the period of approving mortgage loans as a gesture to respond to the central bank, but not much on lowering the rate.” 

Nomura’s Zhang said that he expects further easing of lending, such as the removal of purchase restrictions in second-and third-tier cities. He said the government may also cut banks’ reserve requirements by 50 basis points in the second quarter and a further reduction in the third quarter, making it easier for developers to get financing.

UBS AG economist Wang Tao cut China’s growth forecasts by 0.2 percentage point to 7.3 percent for this year and 6.8 percent for 2015 in a May 5 report, citing a “weaker-than-previously thought” property sector. The economy expanded 7.4 percent in the first quarter, the weakest pace in six quarters.

“If home sales keep falling, price cuts will for sure spread, and probably deepen as well,” said Dai Fang, Shanghai-based analyst at Zheshang Securities Co. “Without the central government stepping in eventually to ease lending, the situation will continue and it won’t look good.” (Bloomberg)