China Tightens Mortgage Rules as Home Prices Keep Rising

China called for higher down payments and interest rates for second-home mortgages in cities with “excessively fast” price gains and ordered stricter enforcement of taxes on sales as authorities step up a three- year campaign to cool the property market.

The People’s Bank of China’s regional branches may implement the measures in accordance with the price-control targets of local governments, the State Council, or Cabinet, said in a statement on its website yesterday. Cities facing “relatively large” pressure from rising house prices must further tighten home-purchase limits, according to the statement.

China’s new-home prices rose for a ninth straight month in February, SouFun Holdings Ltd. (SFUN) said yesterday, 10 days after outgoing Premier Wen Jiabao told local authorities to “decisively” curb property speculation and ordered cities with rapid price gains to limit home purchases. Li Keqiang, No.2 in the Communist Party hierarchy, is set to replace Wen during legislative meetings that start March 5.

“This is a final effort by Premier Wen to put a stamp on the direction of policy before he leaves office and the message is clear: there should be no relaxation of property market controls,” Mark Williams, an economist at Capital Economics Ltd. in London, said by e-mail. “This is a sensible policy. Even allowing for the construction slowdown of last year, the real estate sector remains on an unsustainable path.”

Property controls “are still in a crucial period and expectations of further gains in housing prices are increasing,” the State Council said.

Property Tax

The government will study the experiences of cities that have piloted the property tax and will accelerate and widen the trials to “guide reasonable” housing consumption, according to yesterday’s statement which was dated Feb. 26. Currently, Shanghai and Chongqing are the only two cities that have the housing tax.

Real estate companies found hoarding land or collaborating to push up home prices will be barred from getting new development loans or raising funds in capital markets, according to the government statement. Local authorities must release price-control targets in the first quarter, it said.

Individuals selling properties should “strictly” pay a 20 percent tax on profits from sales when the original purchase price is available, according to the statement. Many sellers now say they can’t provide the data and instead pay a tax of 1 percent of the total sale value, a lower burden in cities where prices have soared, according to analysts.

Purchase Costs

Taxes are typically added to selling prices, Qu Anxin, a Shanghai-based analyst at Centaline Property Agency Ltd., China’s biggest real estate brokerage, said in a telephone interview. Stricter implementation will “noticeably” push up purchase costs of existing homes, particularly in first-tier cities and those with rapid price gains, according to Shi Qi, a Shanghai-based analyst at CEBM Group, an advisory company.

New-home prices climbed 0.8 percent to 9,893 yuan ($1,590) a square meter (10.76 square feet) from January, SouFun, owner of the country’s biggest real estate website, said in a statement, citing a survey of 100 cities. Home values in Beijing added 1 percent from January, and those in Shanghai jumped 1.3 percent, according to SouFun.

Prices of existing homes jumped at least 10 percent last year in Beijing and Shanghai, Centaline’s Qu said.

Raise Rates

The government in 2011 raised the down payment on second mortgages to 60 percent from 50 percent, and required the interest rate to be at least 10 percent higher than the central bank’s benchmark. PBOC branches will probably raise borrowing costs by a further 10 percent, Shi said. Yesterday’s statement didn’t specify by how much the down payments and mortgage rates should be increased.

“The accommodative cycle for the real estate sector has ended and is entering a tightening cycle,” Shi said. “Demand would shrink obviously in the second half and prices may start falling next year.”

A gauge tracking property shares in Shanghai has fallen 1.9 percent this year, compared with a 4 percent gain in the benchmark Shanghai Composite Index.

Chinese regulators “know well the damage a real estate bubble can cause to a nation’s growth and treasury,” David Loevinger, former senior coordinator for China affairs at the U.S. Treasury Department, said by e-mail. “With the middle class being priced out of city centers, China can ill afford to again let real estate prices run far ahead of household income,” said Loevinger, now an analyst in Los Angeles at TCW Group Inc., which oversees about $138 billion.

Too Late

The property tightening measures were announced too late to affect first-quarter economic growth, Song Guoqing, an adviser to the central bank, told reporters at a forum in Beijing today.

Gross domestic product may expand 8.3 percent in the first three months of 2013 from a year earlier, said Song, one of three academic advisers who sit on the central bank’s monetary policy committee. Growth was 7.9 percent in the fourth quarter, the first acceleration in two years.

Property investment, which includes real-estate development, property management and intermediary services, accounted for 18 percent of China’s gross domestic product last year, according to Bloomberg calculations based on National Bureau of Statistics data.

Fundamental Demand

China’s property prices will continue to rise in a gradual manner, Ha Jiming, vice chairman for China at Goldman Sachs Group Inc.’s investment management division, said at the same forum. On the one hand fundamental demand in cities is strong while on the other, the government is trying to avoid excessive home-price increases, he said.

Premier Wen’s three-year effort to curb property prices has included raising down-payment and mortgage requirements, increasing construction of low-cost social housing and restricting home purchases in about 40 cities. Authorities also imposed a property tax for the first time in Shanghai and Chongqing.

The surge in housing prices in major cities “left the Chinese government no choice but to tighten, mainly to dampen price rise expectations,” Shen Jianguang, chief Asia economist at Mizuho Securities Asia Ltd. in Hong Kong, said in an e-mail. “The new measures will definitely dampen property investment and sales.”

To contact Bloomberg News staff for this story: Zhang Dingmin in Beijing at dzhang14@bloomberg.net; Kevin Hamlin in Beijing at khamlin@bloomberg.net

To contact the editor responsible for this story: John Liu at jliu42@bloomberg.net

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