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China Tries Again To Control Construction Boom

by Mary Swire, for LawAndTax-News.com, Hong Kong

28 December 2005


China will launch a new attempt next year to control soaring house prices and the shortage of affordable housing by fine-tuning its development planning and tax policies.

Construction Minister Wang Guangtao said on Monday that the new policies would be designed to restrict land available for high-end developments while encouraging medium to low-priced projects.

In China, rapid urbanization in recent years has led to an explosion in the urban population and a severe shortage of housing in many cities. Last May, 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.

Mr Wang said that despite these efforts, the amount of housing available to low and middle-income families was inadequate. In fact, this year's measures do seem to have had an effect on housing prices, which rose 'only' at an annual rate of 8% in the last six months, compared with 2004's increase of 14%.

The taxes imposed this year, which were in addition to existing real estate use taxes, were aimed at penalizing land speculation by charging gains realized within two years of a real estate purchase.

The Construction Ministry says that investment in real estate in 2005 will have increased by 21% year-on-year, down from 28% in 2004. This is still a stellar rate of growth, obviously.

Apart from the new tax announced in May, China's real estate-related taxes and fees are mostly collected during the period of development and investment. Vice-Minister of Finance Xiao Jie said in March the government is considering imposing a unified real estate tax to solve the issue. Economist Peng Longyun at the Asian Development Bank said a unified tax could help regulate the market and lower home prices.

The government is concerned that housing prices are steadily moving beyond the reach of ordinary citizens, particularly in growth centres markets like Shanghai, where prices have jumped nearly 70% in the past two years. Apartments downtown sell for more than $300,000 - far beyond the reach of the average citizen. Shanghai this year imposed a 5.5% capital gains tax on properties sold more than once in a year.

Development is profitable for municipalities, as well as for developers, so few of them have been inclined to burst the speculative bubble. One exception which will hardly have encouraged others to follow suit was Hangzhou, the capital city of east China's Zhejiang province, which started to collect an individual income tax on the trading of homes on January 1, 2004. Far from damping down prices, the tax simply increased them, and the city had to abandon it in September 2004.


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