China Mulls More Taxes To Cool Real Estate Market

by Mary Swire, Tax-News.com, Hong Kong

22 May 2006

In spite of his assertion that the booming Chinese property market is "under control," Chinese Premier Wen Jiabao stated last week that the government will continue to adjust tax, credit and land policies to curb speculation and ensure an adequate supply of affordable housing for low and middle income citizens.

The announcement in the Chinese state media came after a State Council meeting last Wednesday where the country's most senior lawmakers reviewed measures designed to keep a lid on surging property prices yet prevent the bursting of a real estate bubble.

One of the ways in which the government will achieve its objective would be through more restrictions on land for expensive luxury homes and apartments and easier credit for low cost homes, according to China Central Television. Further taxes and restrictions on profits made by developers could also be on the cards.

Another measure that analysts say the government may use to dampen prices is a restriction on foreign investment in real estate. Overseas investors bought at least US$500 million of completed income-producing property in China in the first quarter, compared with US$1.2 billion in all of 2005, according to property agency CB Richard Ellis Group Inc.

Real estate prices have been surging in China, and developers have been keen to cash in on the boom by constructing mainly high-end commercial and residential developments. Rapid urbanization in recent years has led to an explosion in the urban population and left a severe shortage of housing in many cities for low income workers, leading to government attempts at cooling the construction boom with new taxes and restrictions on development.

Last year, the government attempted to head off a real estate bubble by raising home-loan interest rates, limiting urban demolition and levying taxes on housing sales. However, despite these measures, average home prices in several large cities continue to climb. In Beijing, prices rose 14.8 percent in the first three months from a year earlier to 6,885 yuan, or $860, per square meter, according to the city government. Prices in the southern city of Shenzhen have risen by 25%, and prices in the north-eastern city of Dalian have jumped by more than 10 percent, government data showed.

The only city where the government's cooling policies appear to be having the desired effect is in Shanghai where in the past twelve months prices have been falling after a six-year boom during which they tripled. Shanghai's housing prices dropped 1.3 percent in the first quarter from a year earlier, according to a survey by the National Development and Reform Commission.

Beijing is also worried that the boom in property investment could be storing up economic problems for the future if the bubble bursts, leaving many lenders with an unhealthy portfolio of bad loans.

The central bank recently raised its one-year benchmark lending rate by 27 base points to 5.85 percent, signaling its desire to cool lending. Further increases in the rate could appear on the horizon if tax and legal measures continue to fail.

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