China's new property laws aimed at curbing speculators

Investing in China: Measures taken by the Chinese government to cool down the property market will not hurt long-term investors, say analysts, but could slow down some investments. Clifford Coonan reports

It seems nothing will keep the lid on China's booming property market, and recently, the State Council, or cabinet, issued the latest raft of rules aimed at taking some of the heat out of the market.The measures are aimed at limiting speculation on luxury housing and stabilising property prices while boosting the supply of low-cost housing.

They will make local governments responsible for controlling property prices and prosecute developers who manipulate market prices and information.

Analysts reckon the new measures are unlikely to hit investors seeking a solid return in a growing market, and say by raising the down-payment ratio from 20 per cent to 30 per cent on second homes and larger units, the government is sending the message that speculators and the wealthy should have to pay more upfront for a home than low and middle-earners.

The government also wants to stop a speculation bubble developing as it did in Shanghai last year, when the state intervened.

The Beijing government has been trying to rein in soaring property prices since early 2005, but without success and the new measures are primarily focused on cities like Beijing, Shanghai and Shenzhen. In the first quarter this year, house prices jumped 15 per cent in the capital and 35 per cent in Shenzhen.

Anna Kalifa, head of research at Jones Lang LaSalle's Beijing operations, said the new measures would have an impact on those markets where buyers have short-term speculative strategies.

"Beijing investment buyers have tended to have long-term strategies, and thus will not be notably affected by the sales tax. However, the higher down-payment requirement for second homes and large home buyers could slow down investment in this category."

New home prices in China have largely declined since other cool-off measures were enacted in June 2005, and analysts expect this new measure to prolong this quiet period.

The prospect of further efforts to rein in property speculation was clear after the National People's Congress in March, where delegates expressed concern about rising residential property prices.

Morgan Stanley economist Andy Xie said the new tax will cut down on "flipping" or quick sales of properties, and that the rules demanding additional supply of low-cost housing could have an impact, but he told Xinhua news agency he expected the rules to have only a limited impact overall.

"Like the last time, they will have a psychological impact in causing the market to cool off for four, five or seven months . . . I think this will have a short-term effect. The medium-term effect could be better than expected but I wouldn't rule out the bubble coming back in the future," Xie said.

Jonathan Anderson, chief economist Asia at UBS, said the new rules probably wouldn't be very friendly to market sentiment but wouldn't really mean much for the macroeconomy or ongoing construction growth.

"The bottom line is that the government is not trying to rein in massive real overheating a la 2003; instead, they're simply trying to prevent a couple of annoyingly frisky (but small) high-end markets from multiplying into something bigger down the line," said Anderson.

"We don't see significant cause for alarm. The reason is that these measures are aimed primarily at speculative investment demand for high-end housing, as well as overdevelopment in luxury apartments; in sharp contrast to the 2003-2004 tightening round, the rest of construction activity is hardly addressed at all."

The new rules

• Raising the minimum mortgage down-payment ratio to 30 per cent from 20 per cent for all buyers except for home-buyers purchasing apartments 90sq m (969sq ft) and smaller for self use.

• Levying a 5.5 per cent business tax on the entire sales price for homeowners within two years (currently five) and a 5.5 per cent tax on the profit from the home sold after two years (currently five) if their property was deemed to be a "luxury" property.

• Ending bank loans to developers unless they fund at least 35 per cent of the project costs from their own capital. Properties that have been vacant for more than three years will not be accepted as mortgage collateral.

• Taking back from developers land that has been idle for two years and levying high penalty fees on land which is not developed after one year of the contracted project commencement date.

• Under the new rules, all local governments are required to ensure that 70 per cent of units built are no larger than 90 sq m (969sq ft) (including economy housing).

• Households in existing buildings cannot be resettled unless new replacement housing or monetary compensation has already been allocated.

• The 20 per cent property capital gains tax - which is already on the books but has never been rigorously implemented - should be applied immediately to all major cities.