Beijing: China’s average new home prices edged down for the first time in two years in May, official data showed on Wednesday, underlining a downtrend taking hold in the market as the economy slows.

Average new home prices in 70 major cities dropped 0.2 per cent in May from the previous month, according to Reuters calculations based on data released by the National Bureau of Statistics (NBS).

It was the first month-on-month drop since May 2012.

A cooling of the real estate sector, which accounts for more than 15 per cent of China’s annual economic output and directly impacts around 40 other business sectors in China, could determine the severity of an economic downturn.

“The risk of a more persistent and sharper downturn in the property sector is now the biggest risk facing China’s economy in 2014 and 2015,” Wang Tao, an economist at UBS Bank, said in a note.

Compared to a year ago, new home prices rose 5.6 per cent in May, easing from the previous month’s 6.7 per cent rise and marking the slowest annual rise in 13 months.

New home prices fell in 35 of the 70 cities polled in May from the previous month, up from eight cities in April, NBS data showed.

Month-on-month falls were seen in some major cities, including Shanghai and Shenzhen, which saw home prices drop 0.3 per cent and 0.2 per cent respectively, the NBS data showed.

Existing-home prices also dropped month-on-month in 35 cities in May, compared with 22 in April.

Indicators of a downturn in property coincide with official figures published last week that showed growth in property investment slowed while property sales and new construction fell in May.

DOWNTREND CONTINUES After a strong performance in 2013, China’s real estate market has softened. Sales have slowed and banks have become increasingly cautious about lending to developers and homebuyers.

“The high inventories in some cities and developers’ recent promotions, together with unclear market expectations that kept buyers staying on the sidelines, led the prices to fall,” said Liu Jianwei, a senior statistician at NBS, said in a statement accompanying the data.

Analysts said those high inventories and recent sluggish sales are likely to trigger wider and deeper price cuts in coming months, as developers act to maintain cash flow.

A recent private survey showed China’s vacancy rates around 23 per cent suggest a considerable overhang of inventory, which could undermine property as an investment class and add momentum to price declines.

Evidence of a sharp correction in home prices, however, remains thin, putting to rest for a while at least fears of a hard landing in the property sector and the wider economy.

Among 70 cities monitored by the NBS, only the eastern city of Wenzhou saw a 4.4 per cent annual drop in prices in May, the data showed.

Recent policy tweaks at local level and government efforts to speed up lending may help the market from sliding further.

Many Chinese local governments, which badly need proceeds from land sales to pay maturing debts, have eased home-buying restrictions and made it easier in recent months for buyers to borrow from local housing provident funds.