Obviously, Wen Jiabao doesn't read the South China Morning Post each day with his breakfast congee. Maybe he ought to. Speaking in Macau yesterday, the Chinese premier complained that it was proving more difficult than he expected to cool down the mainland's property market. In a rare admission of fallibility for a senior Communist Party boss, he admitted that his government's administrative restrictions introduced in April had failed to rein in rising home prices. At the time, officials were badly spooked by how quickly property prices were rising. According to official data, over the previous 12 months nationwide home prices had risen by almost 13 per cent. And according to unofficial figures from property agencies they were up a great deal more: by 40 to 50 per cent in some cities in what market professionals were increasingly describing as a speculative free-for-all. Always alert for any potential sources of instability, Beijing rushed out a set of new rules intended to cool the market by making it harder for speculative buyers to get mortgages. Minimum down payments went up to punitive levels on second homes, while in some cities third mortgages were prohibited entirely. In the hottest markets, banks were forbidden to extend mortgages to buyers from out of town. Following the announcement of the new rules a good many analysts argued that the government's measures would successfully cool the market, triggering a correction of 20 per cent or more in residential prices. Not everyone was so sure. For example, on April 20, a couple of days after the new measures were introduced, this column warned that 'the clampdown announced over the weekend may not be as effective as market participants appear to believe'. The reason for this scepticism was simple enough. Although the government's restrictions may well have scared off leveraged speculators, in reality there weren't many around to begin with. Despite rapid growth recently, mortgages are still the exception rather than the norm in China, most home purchases are made with cash. And that cash is withdrawn from China's banks. Back in April, with the benchmark interest rate on savings deposits at 2.25 per cent and inflation running at 2.8, the real return on bank deposits was -0.55 per cent. Rather than see the real value of their savings eroded, people were taking their money out of the bank and putting it into property as a safer store of value. Six months on and despite the government's cooling measures, the property market is still looking attractive as an alternative to bank deposits. Although the government raised deposit rates last month, the inflation rate has climbed much more quickly, hitting 4.4 per cent in October. As a result, as the first chart below shows, the real return on bank deposits is now a highly unappetising -1.9 per cent. That slide in the real deposit rate further into negative territory has defeated Beijing's efforts to cool down the property market. According to Yiu Chung-yim, assistant professor in the department of real estate and construction at the University of Hong Kong, a 1 per cent fall in the mainland's real interest rate typically propels a 3.5 per cent rise in home prices. Well, according to official figures property prices haven't risen by that much over the last six months. But they certainly have not fallen by the 20 per cent that many analysts were forecasting either. As the second chart below shows, the government's April measures produced no meaningful decline in mainland home prices, succeeding only in checking their rise for a few months before appreciation resumed once again. According to official data, nationwide prices are now around 2 per cent higher than they were immediately before Beijing's clampdown. Clearly, as Wen admitted yesterday, cooling the property market with administrative restrictions is harder than officials thought, especially in an environment of low interest rates and mounting inflation. That won't stop Beijing trying. Yesterday, the authorities announced new rules forbidding foreigners from buying second properties on the mainland, although that restriction is aimed as much at deterring speculative capital inflows as at cooling property prices. At the same time, the authorities are leaning increasingly heavily on the country's banks to wind back their new lending to the property sector. And in the longer run, the government is planning a property tax that will make real estate less attractive as a store of value. In the shorter term, however, the only development likely to prove effective at reining back price rises will be an increase in real interest rates, probably through further rate hikes over the coming months. Judging by his comments yesterday, Wen may finally have come to that conclusion too.