Shanghai property tax to cool market

[photopress:Shnaghai_real_estate_1.jpg,full,alignright]The real estate market is overheated. Various attempts have been made to cool it down. Now Shanghai has imposed a profit tax on property transactions. This will significantly increase investors’ transaction costs.

This most recent move should be seen as part, but only part, of the austerity measures intended to cool the overheated property market and expect it to spread to other areas of China.

The sale of properties in Luwan, Huangpu, Xuhui and Jingan districts in Shanghai now incur a profit tax amounting to 20% of the gain in property divestment, rather than the 1% to 2% of the total consideration that applied in the past.

The market believes the measures will be extended to other areas of Shanghai and to other provinces and cities in China if overinvestment in the property market and the stock market persists as it probably will.

An analyst at a US investment bank said, ‘I think the Shanghai government has already tried its best to cool down overinvestment and market speculation, and the result is obvious. And the government is reiterating its tax policy as stated last July, that is, to strictly enforce the existing policy. I think the market was prepared for that, thus the impact from the strict enforcement of the tax will be limited.’

Perhaps. But profit margins will be squeezed due to higher transaction costs and developers will find the profitability of their developments cut by a serious market.

Developers such as Shui On Land must expect a serious effect. The analyst explained, ‘Shui On has a large exposure to Shanghai among its business, and a high proportion of residential projects, mainly high end, which are popular with speculators.’

One possibility mooted by some property agents is that sellers will raise their asking price to maintain their profit margin, which in turn will boost overall market prices. For that to happen there has to be a large group of buyers willing to absorb the extra cost. This, as matters stands, seems unlikely.

Another analyst said the long-term outlook is still positive. The share prices of property stocks and the volume of property transactions will very probably fall in the short term. However, housing demand in Shanghai is very strong, and speculative activity is low compared with other cities.

According to figures from the National Development and Reform Commission average new property prices in Beijing and Shenzhen were up by more than 10% in April year on year, while prices for new residential apartments in Shanghai climbed only a little, at 0.3 percent year on year.

Source: The Standard