Property taxes levied by the municipal governments of Shanghai and Chongqing failed to curb home price rises because they were set too low, say analysts.
They imposed the taxes early in 2011 to cool the market, but in Shanghai prices rose by over 7 per cent last year and in Chongqing prices recovered from a lull in 2011 to surge by 6 to 8 per cent in the second half of last year.
"The rates of property tax in Shanghai are only 0.4 or 0.6 per cent, which is very low," said Alan Chiang Sheung-lai, head of residential property at DTZ on the mainland. Buyers must pay a tax of 0.6 per cent if the price of a flat is more than 27,740 yuan (HK$34,550) per square metre. Below this price the tax is levied at a rate of 0.4 per cent.
Song Huiyong, head of the research department at Centaline (China) in Shanghai said: "Property sales did not fall after the government introduced the tax in 2011 and we did not see developers cut the asking prices of their projects in urban areas."
In 2010, property sales dropped sharply after the government imposed restrictions on the purchase of second homes. "The impact of that move was obvious," he said.
In Chongqing, property prices rose by up to 8 per cent from the middle of last year, according to local property agency New China Property.
"The market was mainly affected by the restrictions on buying second homes, rather than by property taxes," said Andy Ho Wai-kin, managing director at New China Property.
The property tax in Chongqing applies only to high-end properties. Houses or new homes selling for 12,779 yuan per square metre or above are subject to a tax ranging from 0.5 to 1.5 per cent, depending on the price difference with the average property price of the city.
"Only about 5 per cent of new home sales in Chongqing were subject to the tax every year. It is only a small additional payment for buyers who can afford luxury homes," Ho said.
Developers have also adopted ways to escape the tax, Ho said. "They try to keep the asking prices of their projects below 12,779 yuan per square metre, while raising prices for their top-end residential projects to between 20,000 and 30,000 yuan per square metre as those buyers can afford to pay more and the tax will not affect their decisions."
Song said buyers who paid 3 million yuan for a flat would need to pay a tax of only 3,000 yuan. "This is a small amount and won't put them off buying," he said.
The reason property sales in Shanghai had dropped significantly in 2011 was not due to the introduction of taxes but rather restrictions on buying second homes, he said.
Despite their limited impact on the market, Ho believed property taxes might be extended to other mainland cities.
"Sites available for sale are decreasing. Since this will affect the income of local governments they are likely to introduce property taxes," he said.