HONG KONG (Reuters) - New home prices in China rebounded nationwide for the first time in 13 months in May, suggesting a property downturn is bottoming out after a barrage of stimulus from the central bank and local governments since late last year.
Economists, however, warned that massive inventories of unsold homes could continue to drag on the world's second-largest economy well into next year, discouraging new investment and construction.
"Inventories in first-tier cities are back to healthy levels...but in third and fourth-tier cities it will take at least two more years," said Rosealea Yao, economist at Gavekal Dragonomics based in Beijing.
Average new home prices in China's 70 major cities climbed 0.2 percent in May from April, the first rise since May 2014, according to Reuters calculations based on official data released on Thursday.
Weighed down by the cooling property market and sluggish demand at home and abroad, China's economic growth slowed to a six-year low of 7 percent in the first quarter and recent data showed weakness persisted into the second quarter, putting more pressure on the government to step up policy stimulus.
While signs of a stabilization in prices will ease strains on the economy and help banks which are heavily exposed to the real estate market, analysts said a full-blown sectoral recovery was still a long way off.
Official data last week showed residential inventory in May was 21.9 percent higher than a year ago.
Bloated inventories may result in a longer lag between sales and new housing starts than the six- to eight month-long gap previously seen. Hence, bottoming-out of new home prices is unlikely to lead to a recovery in property investment this year, economists said.
"Nine months of good sales growth may lead indicators to show a recovery in property investment, but any recovery will be more muted than what we saw in the past," said Louis Kuijs, Greater China chief economist for RBS.
China's central bank cut interest rates for the third time in six months in May to lower borrowing costs and re-energize the slackening economy. Mortgage restrictions were also eased.
The property industry accounted for around 12 percent of China's economic output in the first quarter, but the sector's slump has hit demand for everything from steel and cement to appliances and furniture - industries that account for some 30 percent of GDP.
The price data also highlighted a growing divide between conditions in the biggest cities and smaller ones, suggesting unevenness in regional growth could become more pronounced.
Prices in all four top-tier cities rose on the month but those in most third-tier cities continued to fall.
Beijing, Shanghai and Guangzhou reported increases of 1.1 percent, 2.2 percent and 1.4 percent, respectively, while prices in Shenzhen surged as much as 6.6 percent, fuelling concerns that the southern city's market could be overheating.
On an annual basis, nationwide prices fell for the ninth consecutive month, decreasing 5.7 percent but narrowing from a 6.1 percent drop in April, the National Bureau of Statistics data showed,
While Beijing would need 13.4 months to clear all empty homes in the city, Haikou, the capital city of resort island Hainan, and Shengyang, the largest city in Northeast China, would need 48.8 and 28.8 months, respectively, according to property researcher CRIC.
Property investment growth slowed to 5.1 percent in January to May from a year earlier, the slowest pace since 2009, while new construction slumped 16 percent.
Editing by Eric Meijer and Kim Coghill