On March 1, China’s State Council announced a new spate of real estate restrictions, aimed at slowing the increasingly property hot market. The announcement came just before this year’s National People’s Congress, the annual legislative meeting during which the country’s new leadership assumed power.
The new measures include a 20 percent tax on profits from selling a home, a capital gains tax that is on the books but has not been widely enforced. People usually pay a tax of 1 to 3 percent on the sale of a property. Some sources have noted that a lack of records of original sales prices has made the 20 percent tax difficult to levy.
Additionally, down payments and mortgage rates will be increased for second homes in certain cities. Down payments are currently set at 60 percent for second homes, while mortgage rates are 1.1 times the benchmark rate. Some speculate that these rates will increase to 70 percent and 1.3 percent, respectively.
Cities and local governments are instructed to institute “property control targets and detailed implementation plans” by the end of March, according to Reuters’ reading of the announcement, including expanding home purchase restrictions and checking that buyers have paid local taxes for at least a year (which qualifies them to purchase a home).
There is also speculation that there will be a widening of the property tax, which is now only being implemented on a trial basis in select cities.
After a period of overheating in 2010 and the implementation of tightening policies in the spring of that year, prices cooled considerably. However, the central government began loosening policies in mid-2012. Ever since, prices have been rising.
As this article from the Wall Street Journal notes, property prices in Shanghai have risen 41 percent year-on-year in January and February of this year. Further, Reuters cited a private survey revealing that average home prices in China's 100 biggest cities rose for a ninth straight month in February. The price increases are largely in tier-1 cities. However, these increases often start at tier 1, and then bleed into tier 2 and tier 3 cities.
Responses to the new policies were dramatic. The day after the announcement, 1,059 apartments were sold in Beijing, compared to 746 the day before, according to Centaline China Property Research Center, as noted on China Economic Net. The head of Centaline’s research department, Zhang Dawei, commented that Saturday was the only time more than 1,000 units have been sold on Beijing’s secondary property market on a non-business day. The stock market also responded: the Shanghai Composite fell 3.65 percent the Monday after the Friday announcement (the biggest fall since August 2011) and the Shanghai Stock Exchange Property Index fell by 9.3 percent.
In the longer term, the uncertainty surrounding how local governments will implement policy restrictions make it difficult to ascertain the impact of the policies on the ground. However, Reuters notes that “the moves would likely accelerate consolidation in the property sector over time, with larger developers cutting prices in a market with fewer home-buying deals.”
The government has made considerable efforts to keep home prices down over concerns about housing affordability, among others. There is considerable risk of citizen discontent if owning a home is believed to be entirely out of reach for all but the richest. Along these lines, the government launched a massive campaign last year to build 36 million units of new subsidized housing by 2015
However, the problem with these tightening policies is that they don’t address the underlying structural issues that cause real estate to overheat. For one, there is a dearth of investment options for Chinese: the stock market is notoriously volatile, there are restrictions on overseas investment and savings account interest rates are outpaced by inflation.
Further, local governments depend heavily on land sales for revenue. This article from the Wall Street Journal cites Li Qingyun, an economist and state counselor, as saying: "As long as local governments rely on sales of land to finance their operations, property prices will remain high.”