China Approves Property Tax Trials to Curb Prices

China approved property tax trials on some homes in Shanghai and Chongqing, adding to measures announced earlier this week in its campaign to curb real-estate speculation and asset bubbles.

Both cities will begin trials for the levy today, following the government’s Jan. 26 announcement it will raise the minimum down-payment for second-home purchases and ask local authorities to set price targets for new properties.

Premier Wen Jiabao on Jan. 18 said the government will “resolutely” implement controls on the real-estate market in the first quarter, including curbing speculation and increasing supplies of affordable housing. Property prices rose for a 19th month in December, even after the government suspended mortgages for third-home purchases and restricted loans to developers.

“Given the limited scope and moderate tax rate, we expect this new policy to have limited incremental impact on transaction volume and price,” Goldman Sachs Group Inc. analysts led by Yi Wang wrote in a report today. The latest measure suggests “the policy uncertainties are now substantially lowered,” they said.

An index of Chinese property stocks lost 0.1 percent at the close, compared with the 0.1 percent gain in the benchmark Shanghai Composite Index. The real estate gauge was the worst- performer among the key index’s five industry groups last year, declining 28 percent. China Vanke Co., the nation’s biggest developer by market value, dropped 0.5 percent in Shenzhen, and Poly Real Estate Group Co. fell 1.2 percent.

Tax Rates

The Shanghai rate is temporarily fixed at 0.6 percent for all taxable residential properties, and is reduced to 0.4 percent for housing bought at prices less than twice the average of newly built “commercial homes” last year, the government said. Average sale prices will be released by the local statistics bureau annually.

In Chongqing, only homes bought at more than twice the average price will be taxed, with units purchased at more than four times the average taxed at 1.2 percent, Mayor Huang Qifan said in a live webcast on the state-run People.com site.

Home prices in Chongqing, in the country’s west, surged 29 percent in 2010 and those in Shanghai jumped 26.1 percent, according to year-end data from SouFun Holdings Ltd., the country’s biggest real estate website owner. Nationwide, the 6.4 percent gain in housing prices in December was the smallest in 13 months.

Low-Income Homes

Property tax revenue will be used to build more low-income housing, the Finance Ministry said earlier in a separate statement. Levying property tax on individual home buyers can guide them to make “rational” decisions, the statement said.

The government last year raised down payments for second homes and restricted loans to developers, and some cities including Beijing limited the number of homes local residents can buy. In October, the central bank increased interest rates for the first time in three years and raised borrowing costs for a second time Dec. 25.

The sooner-than-expected implementation of the property tax trials will further weaken market sentiment and reduce transaction volume, Credit Suisse Group AG analysts led by Jinsong Du wrote in a report today. Housing ministry officials told the company more cities may implement the tax “soon,” without giving names, according to the report.

“While many expect the property tax to signal the removal of the policy overhang, we disagree -- officials told us there should be more tightening measures, especially on credit policies,” the analysts said.

Higher Down-Payments

The down-payment ratio for second homes will rise to 60 percent from 50 percent, the State Council said this week. The Cabinet asked local governments to boost land supply and said they should set price targets for newly built houses based on regional economic growth and disposable incomes.

China reported the most real estate investment in the world for a second straight year in 2010 as development-site purchases helped lift global commercial property sales by 43 percent, New York-based Real Capital Analytics Inc. said on Jan. 26.

Property developers tapped 79.6 billion yuan ($12 billion) of foreign capital last year, a surge of 66 percent from 2009, according to the National Bureau of Statistics.

Rising real estate prices are the “biggest danger” to the Chinese economy, Li Daokui, an adviser to China’s central bank, said in an interview with Bloomberg News in Davos, Switzerland on Jan. 26.

To contact the Bloomberg News staff for this story: Zhang Dingmin in Beijing at Dzhang14@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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