(Yicai) July 15 -- The inventory levels in China’s new property market have returned to reasonable levels in core cities, with Hangzhou and Hefei taking the lead, mainly because of controlled supply.

The months of supply in 30 key Chinese cities averaged 23.9 months as of June 30, according to the latest data from the research center of China Real Estate Information Corporation. Hangzhou and Hefei had nine and 11 months of supply, respectively, while Changsha, Ningbo, Chengdu, Changchun, Shanghai, and Tianjin had 15 to 19 months.

Months of supply measures how long it would take to sell all new homes on the market, based on the current sales pace. Under six months of supply signals a tight supply, six to 12 months represents a healthy market condition, 12 to 18 months indicates a balanced supply-demand dynamic, and above 18 months shows oversupply.

Tight new house supply is the core driver behind the declining months of supply in major cities. “Hefei’s low inventory level largely stems from its proactive supply cuts over recent years, rather than genuine under-supply,” according to a report by CRIC Research Center.

Hefei’s new home supply has shrunk for four consecutive years, CRIC data show. The area of new residential land plots expected to hit the market this year is only 200 hectares, down 73 percent from the peak in 2022. Last year, the supply of new homes was 1.93 million square meters, down from nearly five million sqm in 2021.

China’s new residential property construction area has consistently lagged behind the level in 2022, Cao Jingjing, general manager of the Index Research Department at the China Index Academy, told Yicai. After years of efforts to curb new supply and digest existing stock, the unsold housing area reversed its upward trend which started in July 2021 in March this year, she added.

The continuous expansion of China’s new home inventory has been effectively curbed, according to a report by the E-House China Real Estate Research Institute. Even though inventory volumes remain at historically high levels, existing housing stock is being gradually absorbed.

However, the destocking progress in the property market is mostly passive digestion driven by restricted supply in some cities, rather than a rebound in home sales. In fact, the months of supply for new homes in third- and fourth-tier cities remains elevated.

The average months of new home supply in China’s 50 key cities was 26.1 months as of June 30, CRIC Research data also showed. It was 25.3 months in first-tier cities, 24.4 months in second-tier cities, and 31.6 months in third- and fourth-tier cities.

“Overall, the high months of supply in third- and fourth-tier cities are closely linked to weak local housing demand and low transaction activity,” CRIC Research explained. “Destocking will remain a long-term challenge for these cities.”

Editors: Tang Shihua, Futura Costaglione