• China's residential properties have seen strong demand, and there are three factors that are driving it, said Linan Liu of Deutsche Bank.
• In the household sector, "there's still fairly robust demand for properties, either for upgrade or for primary residence," she said.
• Official data on Thursday showed that new home prices in May rose 4.9% from a year ago, compared to a 4.8% increase in April.

China's residential properties have seen strong demand, and there are three factors driving it, according to Deutsche Bank's Linan Liu.

Data released Thursday by the National Bureau of Statistics showed that new home prices in May rose 4.9% from a year ago, compared to a 4.8% increase in April.

The average new home prices in 70 cities also rose 0.6% from April, the same growth that was seen in April from March.

Property investment has been "fairly strong," while manufacturing and infrastructure investment have been below expectations, said Liu, head of Greater China macro strategy at the bank.

In the household sector, "there's still fairly robust demand for properties, either for upgrade or for primary residence," she told CNBC's "Street Signs Asia" on Thursday.

Rise of urbanization

One factor driving demand is the rising pace of urbanization, she said, noting that at the end of 2020, China's urbanization ratio was around 64%.

"We expect the ratio to rise over the next five years towards 70% or 75%," she said. "I think the urbanization drive will continue to support property sector demand."

If cities get more crowded and demand outstrips supply, prices could rise.

Three-child policy

Another factor is China's new three-child policy, Liu said.

In a major policy shift, the central government said last month that couples will now be allowed up to three children instead of the previous two-child limit.

"This perhaps will boost the demand for bigger property, for upgrade and so on. This will continue to support demand, especially in large cities — tier one, tier two cities," she said.

A Nomura research note pointed to a 0.7% increase in home prices in tier-one and tier-two cities, compared to a 0.4% rise in tier-three and tier-four cities.

China is facing the challenges of a rapidly aging population, which has economic consequences including slower growth in productivity. Data shows a decline in births, as population growth slowed to its lowest rate since the 1950s, prompting the shift in policy.

Still, it's unclear whether the new policy will encourage people to have more children. After the announcement, more than 30,000 online respondents in a poll by state news agency Xinhua said they weren't considering having more children as a result of the new policy.

Improving jobs market

Finally, an improving labor market could fuel demand for property, according to Liu.

China's overall unemployment rate for cities fell to 5% in May — the lowest since May 2019, Reuters reported.

"With improving job market condition, better income growth, I think consumers or households are still looking for (an) upgrade or buying primary (residences)," Liu said.

However, Nomura analysts said they expect Beijing to "strictly carry out its tightening measures on property sector financing."

"We believe this may exert more downward pressure to growth" in the second half of the year — especially in the fourth quarter of 2021, they wrote.

— CNBC's Evelyn Cheng contributed to this report.