By Clare Jim
HONG KONG (Reuters) - Chinese cities at the forefront of the latest surge in housing prices are expected to tighten policies to make it tougher to buy property and head off the speculators who are partly behind the rally.
A recovery since late last year in China's property market has provided a rare bright spot for an economy that is slowing rapidly, but some cities are showing signs of overheating.
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Top-tier centers including Shanghai and Shenzhen have already tightened conditions to calm their local markets. But data on Saturday showed smaller cities were now also seeing big rises in property values.
Average new home prices in May in the eastern city of Hefei rose more than 20 percent from a year earlier. They also rose more than 20 percent in Nanjing and were up 28 percent in Xiamen, cities also in the east. The rises compared with gains nationally of 6.9 percent.
Local media in Hefei reported the local government was set to raise downpayments for buyers of second and third homes. Property agents and developers said Xiamen and Nanjing would likely follow suit with similar measures.
Property agents estimated that speculative buying accounted for half of the total transactions in some of these cities this year, up from about 20-30 percent before.
"When you start to see the market picking up and prices growing, you think if I don't buy now I might not be able to buy later at this price," said James Macdonald, Savills' head of research in China.
"Certainly it creates the release of some pent up demand but there is also a bit of investment as well. Those investors who find it hard to purchase in a certain market might shift to focus on other markets which don't have the same tough restrictions."
Cities where building land was sold at record levels during the market recovery of the past year are attracting the most speculative money, property agents said.
These cities have tight land supply and low housing inventory, so many investors see these markets as a one-way bet because the houses built on the land will have to be sold at a higher price as well.
"High land prices have attracted speculative investments," said Andy Lee, vice president at realtor Centaline China. "Property is a good investment in an environment that lacks other investment channels."
The Hefei Evening Post said the local authority will raise downpayments on second homes to between 40 percent and 50 percent from 35 percent now, and to 60 percent on third homes, citing a document from a government meeting. The report didn't specify what the previous downpayment limit was on third homes.
The city government will also reduce the time developers have to pay for land purchases to between one and six months, after a flurry of record transactions this year. It didn't say what was the previous time limit.
Nanjing and Suzhou last month put limits on how much developers can offer in land auctions.
Developers are paying high premiums for land in Hefei, as inventories are only enough for 2.3 months at the current rate of sales, data provider CRIC says.
Experts, however, say household debt is relatively low in China so despite the rise in house prices, credit risks remain low.
"China's residential market is very different to other markets like Hong Kong, the U.S. and the UK," Savills' Macdonald said. "Yes there is debt but it's a manageable amount from a mortgage perspective."
(Reporting by Clare Jim; Editing by Neil Fullick)