Heavy tax to dampen speculation

20% levy on capital gains by sellers to rein in housing prices

In one of its sternest measures to hold back the rise of housing prices in major cities, the State Council, or China's cabinet, on Friday ordered that a 20 percent individual income tax be levied on capital gains by home sellers.

This is the latest regulation following the cabinet's meeting on Feb 20 about the urban residential housing market.

Currently, only a 1 percent individual income tax is levied on the sale price, much lower than the 20 percent tax on the difference between the sale and purchase prices.

"The measure will definitely lead to a sharp drop in property transactions and change people's expectations," said Ji Gang, a senior director in the investment department of real estate service provider Savills Property Services (Beijing) Co.

Meanwhile, for cities that experience soaring property prices, the branch of the central bank could further hike down payments and mortgage rates for second-home buyers, in line with the price target set by local government, the statement said.

Earlier media reports suggested that down payments for second-home purchasers were likely to be increased to 70 percent from 60 percent, and the mortgage rate could be hiked to 1.3 times the benchmark interest rate instead of the current 1.1 times. "Tightening financing is a shortcut to curb the price hike, as quite a number of bank loans in January go to property developers and individual buyers," said Ji.

Time is still needed to see if home prices will drop after those new measures, Ji added.

"If most of the potential sellers decide to give up their plans to sell properties but demand remains very strong, the price could still hardly fall," said Ji, citing a similar situation that occurred in Hong Kong years ago.

For Zhu Zhongyi, vice-president of the China Real Estate Association, first-home buyers will be the driving force for the property market after all the new measures are in place.

Potential home buyers and sellers are also waiting for the coming two sessions of the nation's legislature and advisory body to see if more detailed real estate policies will be launched.

"Some of our clients decided to put their homes up for sale after the annual session of the National People's Congress in early March, as they are waiting for a clear picture and will decide on the sales price afterwards," said Hou Zhanzi, a sales agent with HomeLink, a Beijing-based real estate agent company.

Property prices in China's major cities saw a ninth consecutive monthly increase in February, with more reporting a price hike, statistics from a real estate research institute showed on Friday.

According to China Index Academy, a Beijing-based real estate research institute, the average price of new homes in 100 monitored cities was 9,893 yuan ($1,587) per square meter during the month, up 0.83 percent from January.

The month-on-month growth rate, according to the academy's figure, is down 0.17 percentage points from the previous month.

However, on a yearly basis, the growth was 2.48 percent in February, compared with a 1.2 percent year-on-year increase in January. It was the third time for 100 cities to see a price increase on a yearly basis, with the growth rate further accelerating.

Meanwhile, 10 more cities reported a price hike in February than the previous month, while the number of cities experiencing a price drop fell by nine from January.

The average home price in the key cities, including Beijing and Shanghai, stood at 16,596 yuan per sq m, an increase of 1.09 percent from the previous month and up 4.32 percent over the same period last year.

The continuous rising home price has triggered worries of mounting risks in the country's property market.

"We see continuing risks in China's property market and believe the country's newly elected leadership will be proactive in implementing existing policies to control the property market and seek to introduce new cooling measures if upside risks intensify in certain cities or regions," said Shen Lan, an economist at Standard Chartered Bank

But the government may tolerate a pickup in the sector as long as price increases remain in line with underlying fundamentals, according to Shen. "That said, continuing policy pressure should ensure that any upward pressure on home prices is kept in check," she added.

Meanwhile, the government will also put more land on the market to boost the supply, according to the statement.

Property developers, fueled by improved cash flow, are still quite optimistic about the market and are strengthening their competition for more land parcels.

In Beijing, a total of 13 land parcels valued at 10.7 billion yuan ($1.7 billion) were sold on Thursday, with the premium price dropping compared with the end of 2012, industry statistics showed.

There were 33 real estate enterprises competing for the 13 land parcels, and the highest price premium was 50 percent, lower than the record 400 percent premium recorded at the end of 2012.

According to Zhang Dawei, head of Centaline's research department, as the government has launched more land parcels in the market, the competition was not as fierce compared with the end of the year, effectively curbing the price increase.