Talk of a property bubble across China may be a little exaggerated but Beijing is taking no chances with a raft of new measures aimed directly at property speculators and smaller real estate developers.
In real terms, property in China is more affordable now than it has been in a long time. Countrywide, an average 70-square-meter apartment costs about US$24,000 (RMB189,000), 4.7 times average household incomes. Three years ago, it was 10 times the average income.
"The Chinese real estate market remains bright for selected markets in the next two years," said Budi Chen, CEO of Pangu Investment, a Shanghai-based real estate consulting firm.
"I would be cautious for cities that experienced high growth rates in the past such as Shanghai, Beijing and Qingdao. There is, however, continued demand in second- and third-tier cities."
Growth in property prices peaked at 10% in late 2004, said Jonathan Anderson, chief Asia economist at investment bank UBS, and growth has slowed since.
Prices continued to grow at 5-8% towards the end of 2005, but even luxury property prices, which have traditionally risen faster, stayed below 10%. Increases in the larger cities have been steeper, but not steep enough for a bubble.
But government officials seem to hold a different view. In February, China's State Administration of Taxation (SAT) implemented a new tax to curb real estate speculation. Local developers panicked and property shares plunged.
The land value-added tax (LVAT), first introduced in 1994, levies developers between 30% and 60% of the value by which their land appreciates. It is only one of several market cooling measures implemented since 2004.
In 2006, the government increased capital gains taxes on real estate, pushing developers to build more affordable homes, and tightened rules on property purchases by foreigners. In addition, down-payment requirements for new homes have risen to 30% from 20% and the period when owners must pay a tax if they resell has been extended from two to five years.
But, even if the countrywide market is stable, as Anderson says, real estate in China's larger cities is hot. The property sub-index in the Shanghai Stock Exchange has quadrupled since mid-2005.
The new measures may slow down some of these booming markets by keeping out the less sophisticated players, but Chen argued the effects would cause no lasting damage.
What the LVAT is unlikely to bring is higher costs for buyers – from a developer's point of view, any price rise would serve to increase the amount of tax. In fact, there may well be less mass construction, making house prices more justified.
For developers, it could mean taking a hit on profit margins or leveraging properties with new loans.
"We will definitely see a slowing of volume of new property and developers experiencing more liquidity problems," one property analysts with an investment bank said. "[The tax] will affect supply a lot more than prices of homes."
While it is unlikely the new LVAT tax will lower housing prices, Chen does expect it to wipe out the easy profits of the past. The Chinese government is putting the burden of providing affordable housing on the private sector.
Without giving a timeline, Beijing proposed a unified property tax last October that would simplify and lower transaction costs, Chen said.
"This tax isn't meant to ease speculation, but rather, ease financial burden for low income families," he said. "It won't have a big impact on the market."
According to the SAT website, a separate tax is in the works for property sales and purchases, although no details have been released.
"The government wants all of the speculators out of market," the investment bank analyst said. "People won't be able to buy property and just sit on it, so it will [have] an immediate impact… for people who are just trying to hold on."
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