Housing headache

 Along with growing headline inflation figures, ever-rising property prices have turned from a lingering headache into a full-blown migraine for authorities in Beijing. By the end of 2010, property prices nationwide had posted 19 months of consecutive year-on-year increases. While December’s price growth of 6.4% was far lower than April’s record high of 12.8%, prices continue to creep up in month-on-month terms.

At the end of January, the central government allowed Shanghai and Chongqing to levy taxes on property holdings. Such a tax had been talked about for years – particularly at the height of the property bubble in 2007 – but plans were shelved repeatedly due to uncertainties over implementation and concerns about how the market would react.

With a tax rate of up to 0.6% in Shanghai and of up to 1.2% in Chongqing, the results so far have been unclear. The tax was announced ahead of the Lunar New Year holiday – the off-season for the housing market. A surge in purchase agreements before the tax came into effect was followed by a lull in sales as potential homebuyers waited to see how it played out. By mid-February in Shanghai, sales had fallen up to 8.6% week-on-week.

Sales in Shanghai and Chongqing are expected to remain subdued over the first quarter, but will likely return to their usual buoyant levels. Both cities’ taxes currently target high-end housing, and owners of multiple homes – the speculative buyers blamed for driving up prices. But demand for new homes remains strong.

The central government knows the property tax will not in itself stop rampant price growth, but it is eager to see how the levy is absorbed by both cities before rolling out trials elsewhere – most likely Beijing, Guangzhou and Shenzhen. Even absent a new tax, however, recent regulations raising down-payments on second-home purchases to 60% from 50% are likely to have a cooling effect. Together with three interest rate hikes in as many months and stiffer mortgage rules in provinces across the country, the noose is tightening around the housing market’s neck.

Beijing’s local government has come down even harder: Newly released regulations bar local families from buying a third apartment in the city, while non-locals can only purchase one apartment. Beijing has also made it tougher for non-locals by requiring proof of tax payments in the city for a total of five years, compared with the old requirement of just one year.

It will take time for these rules to take effect, but the message is clear: The central government does not want a repeat performance of last year’s property bubble. At the same time, officials don’t want to be seen as kicking the legs out from under the market, as they did with austerity measures in 2007. Investors will be paying close attention.