New rules to hit property market

Moves to crimp real estate sales, bring down prices

The State Council launched a new round of measures one week before Spring Festival to rein in property prices in major cities.

The Shanghai municipal government also announced a long-awaited property tax on Jan 27, the same day when Chongqing released its own version of a property tax to cool housing prices. The property tax showed the central government's resolve to rein in real estate speculation, analysts say.

The property tax trial that started from Jan 28 in Shanghai and Chongqing targets high-end and newly purchased second homes, respectively, and requires buyers to pay between 0.4 to 1.2 percent of the housing price annually.

According to a statement from the Shanghai housing department, a temporary real estate tax of 0.6 percent will be levied on homes, with the potential for a reduced rate of 0.4 percent for low-priced properties. The tax applies to second homes purchased by Shanghai residents and to any home purchased by non-residents, according to the statement.

The policy has started to take effect, and trading volume withered in the first week of February in Shanghai.

Seventy units of newly built residential properties in the city were sold during the eight days from Feb 1 to Feb 8, a nosedive of 96.2 percent compared with that period in 2010, according to Century 21 China Real Estate data, a US-headquartered property service provider.

Fifty-three percent of the 70 units were between 90 square meters (sq m) and 140 sq m, 27 percent were smaller than 90 sq m, and the remaining 20 percent larger than 140 sq m.

"This is in a sharp contrast from one month ago, when larger apartments were more preferred," said Luo Yinshen, a researcher at the Century 21 China Real Estate in Shanghai.

"This indicates the property tax has influenced home buyers' decision," Luo added.

In Chongqing, Mayor Huang Qifan announced a similar measure at a press conference on Jan 27, specifying a variable rate real-estate tax of 0.5 percent, 1 percent and 1.2 percent, on high-end homes with the rate varying according to transaction prices.

The measure will apply to both existing and newly purchased homes, and could potentially be based on the appraised value of the home within three or five years' time, Huang said.

"It is impossible for housing prices to fall overnight, but it will help to curb speculation in the housing market," says Chen Jie, a professor specializing in real estate research from Fudan Univeristy.

Home prices in 70 major cities in December rose by 6.4 percent compared with a year earlier, figures from the National Bureau of Statistics showed. Residential property prices increased across 70 cities, among which newly built residential prices edged up 0.3 percent month-on-month, and second-hand residential apartments' prices increased 0.5 percent compared with that of November.

According to Huang Hetao, an analyst from Century 21 China Real Estate in Shanghai, the property tax is mainly aimed at narrowing the income gap and guiding housing consumption in the right direction.

"Therefore, the new tax will make less impact toward housing prices," he says.

The timing for the announcement of the property tax, made one week ahead of Spring Festival, was also made with careful deliberation. The pre-Spring Festival period is a traditional off-season for property trading, and the move will give the market enough time to digest and cushion any negative impact, Huang says.

Chen welcomes the new tax. "The Shanghai version protects the majority of local residents and dampens excessive speculation," he says.

"The property tax will lead the housing price downward together with the impact of the new housing regulation released by the central government a day before," says Lu Qilin, deputy director of Uwin Real Estate Research Center.

On Jan 26, the State Council released an eight-term tightening regulation to cool the nation's housing market, including raising the down payment of second home buyers to 60 percent of the full property price from a previously required 50 percent.

"The increase in down payment rates presents a more significant hurdle for potential buyers and should have more impact on prices in the near term than the property tax," says Michael Cole, research director for East China division of Colliers International, a global real estate service provider.

The increase in down payment requirement is likely to have a direct impact on the second-hand home market, both for transaction volume and property prices, but will not reverse the long-term upward trend in the sector.

"As we saw last April, when down payments were increased from 30 percent to 50 percent and prices continued upward, this new measure will reduce growth in housing prices without actually bringing prices down," Cole says.

Many speculators that had planned to buy properties will shift to other cities due to the higher cost of maintaining a house in Shanghai, and the housing price may slip as much as 10 percent with a slump in trading volume, Lu says.

"Considering the property market's key role in the nation's economy, the housing price is not likely to slump too much," Lu says.

"As foreseen, the government is increasing the frequency and intensity of its measures to cool the property market during the first quarter of 2011," Cole says.

In its current format, the property tax in Shanghai is at a low enough rate for it to not have a significant impact on buyer enthusiasm beyond the short term. However, if the rate is adjusted upwards, the tax could be a potent weapon for controlling the market, he says.

During the first half of 2011, investors in China's real estate markets can expect to see marked reductions in transaction volumes, with prices remaining stagnant. However, unless the government introduces more significant measures or dramatically increases property tax rates, the residential market can be expected to recover by the fourth quarter, once buyers have had time to adjust to the new measures, Cole says.