Hope to build on
(China Daily)
Updated: 2005-05-25 09:36

Rong Meiling has long dreamt of buying a new, less-expensive home. Now, the central government's macro-control measures might make her dream a reality.

Soaring housing prices, driven mainly by real estate speculators looking to make quick money, have kept Rong, a 33-year-old resident of Shanghai's Pudong Area, from realizing her dream.

But the government's crackdown on such purchases through tax measures and rising interest rates aimed at stabilizing housing prices might change that.

Beginning on June 1, the central government will levy a business tax on the full earnings of home sales if the owners sell the units within two years of their original purchase dates.

The government will also levy a tax on the difference between the sales and purchase prices of luxury residential housing, if owners sell the units within two years of their original purchase dates.

"The measures are good news for me," says Rong. "I believe housing prices will become rational."

Gu Yunchang, secretary-general of the China Real Estate Association, says the measures will affect the housing market, especially in the coastal areas, such as Shanghai and Hangzhou, where real estate speculation is rampant.

In Shanghai, housing sales have already tumbled, as people are watching and waiting, Gu says.

Meanwhile, supplies of housing have increased, as some people have rushed to sell what they newly purchased units to avoid paying the taxes.

Some Chinese media have reported housing prices have begun falling.

Zhang Xueying, a senior economist with the State Information Centre, says the latest measures will help stabilize housing prices.

However, he adds, it will take time to determine the full effects of the policy.

The average housing price in China rose 14.4 per cent last year.

It rose an additional 12.5 per cent, year-on-year, during the first quarter of this year.

Economists suggest housing prices rose too high and too fast, which created bubbles in the sector.

They worried the bubbles would result in several economic problems if the government did not properly handle the issue.

Premier Wen Jiabao last month presided over one of the State Council's executive meetings, at which he said the government would implement eight measures including tax and stricter land-supply policies to improve macro control over the real estate sector.

Only scant details of that meeting were made public.

On May 11, seven government departments including the Ministry of Construction, Ministry of Finance and the National Development and Reform Commission outlined the new macro-control measures.

The government vowed to try to curb speculative buying, and to increase supplies of small and medium-sized homes at the low-end and mid-range price range.

Also, local governments must issue clear requirements on price levels and housing sizes before permitting use of the land in question.

Land owners will also be required to pay a fee if their properties remain undeveloped a year after the purchase date. They will lose the right to develop the properties if construction has not begun within two years.

Wang Zhao, a senior researcher with the State Council Development Research Centre, says the measures, which will increase control over both supply and demand, will help ensure the healthy development of the real estate industry.

That, he adds, will benefit China's overall economy.

China's economy grew 9.5 per cent, year-on-year, during the year's first quarter. It was fuelled largely by fast fixed-asset investments, including within the real estate sector.

Urbanization, which has propelled development of the real estate industry, and industrialization have been key engines of China's economic growth since 2002, he adds.

However, fast urbanization results in rapid development of a nation's real estate industry, and, as a result, higher housing prices.

Fast growth in the real estate sector encourages investments in other sectors, such as steel, cement and aluminium, and reduces supplies of coal, electricity, oil and transportation, he adds.

These are the major problems currently existing in China's economy, he adds.

"If the government's macro-control measures can fine-tune development of the real estate industry, other economic problems will be solved," he said.

Since last year, the central government has implemented several measures including raising interest rates on mortgages, tightening credit and reducing land supplies to cool down the real estate sector.

But reducing land supplies resulted, to some extent, in higher housing prices.

While the government continued emphasizing supply management, it needed to enhance guidance-on-demand, Wang says.

People's immature consumption behaviour forced the government to act, he adds.

People prefer buying large homes, even though they have little purchasing power.

In other countries, people tend to rent first and buy their homes when they have more money.

Tax and monetary measures are a good way to guide people's buying behaviour, he says.

The actions of some people a few months ago prove that point.

The People's Bank of China (PBOC), the nation's central bank, raised interest rates last October. It was the first rate hike in nine years. The rate on a mortgage, with a term not more than five years, rose 0.27 percentage point.

On March 16, PBOC announced further measures aimed at tightening housing loans. The interest rate on loans with terms exceeding five years rose 20 basis points, to 5.51 per cent.

In addition, downpayments in cities where lenders believed real estate prices were rising too fast were hiked from 20 per cent to 30 per cent.

Those measures prompted many home buyers to pay their mortgages ahead of schedule.

Economists say the rate hikes increased people's expectations the central bank will raise the rates again, which will add to their financial burdens.

"The real estate industry is sensitive to interest rate adjustments," Wang says.

A rise in the interest rate means buyers will have to pay more to own homes, and developers will have to spend more money to build the units, he adds.

"If the latest moves fail to achieve results, the government can consider implementing further interest rate measures," he says.

For example, the central bank can raise the housing loan interest rate, while maintaining the rates on other loans, he adds.

However, tax and interest rate policies are only short-term measures.

To ensure the long-term development of China's real estate market, the government should regularize the current taxes and fees, and try to implement a unified real estate tax, Wang says.

Many economists believe China's real estate-related tax policies have lagged market demand for more than 10 years.

A majority of China's real estate-related taxes and fees are collected during development and investment, says Peng Longyun, a senior economist with the Asian Development Bank.

Taxes and fees levied during transactions and the time when the houses are utilized are relatively low, he adds.

Vice-Finance Minister Xiao Jie in March said the government was considering imposing a unified real estate tax to solve the issue.

Peng said the unified tax could help regulate the market and stabilize housing prices. China currently levies six real estate-related taxes land-value-added tax, urban-land-use tax, arable-land-occupation tax, real estate tax, urban real estate tax and the contract tax.

Close