As China's real estate climate index climbed to a three-year high in August, the government will likely face more challenges in stabilizing property prices.

To rein in the increase in house prices, the central authorities have long focused on tackling problems on the supply side. But those efforts have achieved little in persuading local governments and property developers to substantially increase land and housing supply.

Hence, it is high time to try tightening measures that can effectively slow the demand growth, especially speculative demand in the housing market.

The average housing price in 70 major cities had increased by 8.2 percent year-on-year in August, the fastest monthly growth this year.

Latest figures from the National Bureau of Statistics show that the national estate climate index reached 104.48 last month, 0.48 and 1.17 percentage points higher than the previous month and for the same period last year respectively.

It was reported recently that the central bank is mulling whether to lift the down payment ratio for buying a second house from 30 percent to 40 percent.

Such an overhaul of the country's mortgage lending policy will be much needed because it can help curb speculation in the domestic housing market.

Mortgage loans are a key driving force behind the rapid growth in bank lending and accelerating property prices in recent years.

In mere a decade, China's mortgage loans as a share of total loans outstanding have rocketed from 0.2 percent to 9.4 percent in 2006.

The low down payment ratio has undoubtedly fanned speculative house purchases that have added fuel to the soaring house prices.

By raising the minimum required deposit on mortgages for repeat buyers, domestic banks, the main source of funding for homeowners, will cut speculative housing demand and cool the property market. Moreover, the move will also urge domestic banks to reduce their exposure to an overheating property market and rein in their lending growth.

In recent years, Chinese banks have competed hard with each other to expand mortgage lending to increase their profits, asset base and market share. As the mortgage non-performing loan ratio remains low, such practice appears viable.

However, as soaring inflation keeps pushing up the country's interest rates, Chinese banks should re-examine their exposure to an overheating property market as prudently as possible.

(China Daily September 20, 2007)