China introduces property taxes in some cities to cool market

PUBLISHED : Friday, 28 January, 2011, 12:00am
UPDATED : Friday, 28 January, 2011, 12:00am

Chongqing and Shanghai have become the first cities on the mainland to impose property tax on high-end apartments. The tax, which will be imposed from today, is aimed at helping the central government crack down on speculation and contain home prices.

Chongqing mayor Huang Qifan last night announced the city would levy a 0.5 per cent to 1.2 per cent tax on new luxury properties. The Shanghai municipal government, meanwhile, announced it would impose a 0.6 per cent tax on second homes larger than 645 square feet.

The new rule comes on the heels of additional tightening measures announced by the State Council. These included raising the minimum down payment for a second home to 60 per cent from 50 per cent and stipulating that local governments set price controls. Mainland property stocks tumbled across the board yesterday following the State Council's new curbs.

'These measures were more aggressive than what we had expected. We would label these as the third round of property tightening as the first round [introduced in April last year] and the second round [in late September last year] of measures failed to bring down property prices,' Jun Ma, chief economist for Greater China at Deutsche Bank, said.

In recent months, weekly transactions in 35 cities have nearly doubled from their October lows, putting significant upward pressure on property prices, Ma says. At the end of yesterday's trading, Longfor Properties dropped 7 per cent to HK$11.16, Shimao Property Holdings was down 5.95 per cent to HK$11.68, Agile Property Holdings fell 5.31 per cent to HK$11.4 and China Overseas Land & Investment shed 4.9 per cent to close at HK$14.74.

David Ng, head of regional property research at Royal Bank of Scotland, said the measures might help slow price growth and even reduce transaction volumes.

'But they are unlikely to cause prices to drop as developers' cash positions have been strengthened by bumper property sales last year,' he said. Some developers had built up a war chest by issuing high-yield bonds to fund land acquisitions.

With strong balance sheets and sufficient capital reserves, he expects developers to be able to maintain a holding pattern rather than dumping their projects at steep discounts.

The State Council also slapped a 5.5 per cent business tax on gross sales - rather than net gains - for individual units resold within five years.

Qu Hongbin, co-head of Asian economics research at HSBC, said the measures, coupled with the property tax in Chongqing and Shanghai, should help cool property prices.

'Implementation at the local level will be key to the success of the new measures. With the 2012 leadership transition almost upon us, local leaders are under pressure to cool down the property markets.'