Applying the brakes

PUBLISHED : Friday, 25 February, 2011, 12:00am
UPDATED : Friday, 25 February, 2011, 12:00am

Worry over the property market on the mainland has prompted the government to introduce a barrage of measures, including its first trial property tax aimed at curbing speculation and reining in soaring prices.

Shanghai and Chongqing became the first two mainland cities to levy property tax for mainly high-end and newly purchased second homes, requiring buyers to pay a levy of 0.4 to 1.2 per cent. All villas and townhouses in Chongqing will also be taxed.

The State Council also announced an eight-term tightening policy to cool the housing market, including raising the down payment of second homebuyers from 50 per cent to 60 per cent and restricting the number of homes that can be bought. People who own one apartment are allowed to buy another, but those with two will not be permitted further purchases.

As the official regulations, with regards to the property tax, just came out at the end of last month, with the typical slowdown during the Lunar New Year, James Macdonald, head of Savills Research (China), says, 'the introduction of the property tax is unlikely to cool the residential market by itself, but may in the short-term generate some market uncertainty, a drop in transaction volume and price volatility'.

Michael Cole, director of research for East China at Colliers International, says: ' If you compare the increase in housing prices over the past five years with the increase in household incomes over the same period, the increase in asset values does not appear as extreme.

'China still offers relatively few investment channels for wealthy individuals. So as long as China continues to show strong economic growth, and especially as inflation makes bank deposits less competitive, local people will continue to invest in housing.'

Brokers are already reporting a drop in housing transactions, he says. However, this is more likely due to the combination of interest rate increases, hikes in bank reserve ratios and increased down payment requirements along with the new tax, rather than just the property tax itself.

Coles expects to see a marked reduction in the number of housing units sold in the first half of this year. The new measures should reduce the rate of increases in property prices but they should not bring asset values down.

Clement Leung, executive director of China valuation at Knight Frank, says homebuyers in Shanghai and Chongqing will likely prefer to stay on the sidelines. Transaction volumes will fall in the short term, but prices are expected to remain firm.

'We should see the market stabilise provided that the market sentiment is cooled off,' Leung says. 'If prices continue to soar, more drastic measures may be introduced.'

Stability is a key concern. The central government has been trying hard to strike a balance by containing property price increases while maintaining the growth momentum.

'This year will most likely be another tough year for the property market with a number of regulations and new policies,' Macdonald says. 'With fundamental drivers which supported the market in 2010 still present, there is likely to be strong resistance to the government's attempts to cool the market. It means that very little new supply will be released on to the commercial market.'

'Limited supply and robust demand are almost always a recipe for price rises and, despite government attempts to avoid this, we are likely to see the same again this year.'