China Seeks to Damp Prices On Real-Estate with Taxes

By Andrew Browne
From

A new crackdown on property speculation signaled by Chinese Premier Wen Jiabao reflects growing concern among China's top officials that surging prices in major cities threaten to create economic overheating and social unrest.

Since authorities took steps to cool Shanghai's real-estate market last year, speculators have piled into other cities, creating new property bubbles. In northeastern Dalian, prices for new property in the first three months of this year jumped 15% from a year earlier, according to the National Development and Reform Commission, the former state planning agency. Prices in the southern boomtown of Shenzhen gained 10% in the same period while Beijing prices were up 7% amid euphoria over the 2008 Olympics in the Chinese capital.

And those figures may understate the problem. Other government agencies, using different calculations, put the price increases far higher. In Beijing, for instance, the city statistics bureau reported that prices of property sold off the drawing boards rose 17% in the first two months of the year.

Chinese economists say that owning an apartment is now an unrealistic dream for large numbers of urban residents who are falling further behind as home prices surge. Zhong Wei, an economist at Beijing Normal University, said the price of the average apartment in Beijing is 13 times the annual average salary. He estimated that 70% of the Chinese capital's population can't afford to buy.

"Everybody has a desire to own an apartment," said Mr. Zhong. "But this is not possible."

Property is a big driver of Chinese economic growth, and runaway investment in the sector has contributed to signs of a broader overheating. The economy grew by a red-hot 10.2% in the first quarter of the year from a year earlier. Concern about too-rapid growth prompted the government to raise bank lending rates by 0.27 percentage point last month to discourage borrowing and reduce investment. Officials fear overheating could lead to a sudden economic crash.

Mr. Wen has fired a warning salvo at city governments and the real-estate developers who have become their chief source of funding. After a meeting of the State Council on Wednesday, the Chinese cabinet announced a series of policy measures to rein in prices, according to state media reports.

The announcement included few concrete details but indicated the government would seek to cool prices by levying profit taxes on real estate. These taxes are similar to those that helped deflate the Shanghai market last year by scaring off speculators who "flipped" property -- sometimes just days after buying it. The cabinet also suggested curbs on bank loans to the sector, and it called on local governments to focus new development on smaller and more affordable homes for lower-income families.

The measures took aim at property developers who hoard land and buildings, a practice that creates artificial shortages and drives up prices. At the same time, the cabinet urged local governments to offer more price information. In the absence of transaction data, Chinese buyers often are at the mercy of developers with an interest in inflating prices.

Since the government clamped controls on the runaway property sector last year, the cabinet noted that prices had softened "a little," according to the official Xinhua news agency.

"However, some problems have not been solved including rapid price rises in a few big cities, bad supply structure and messy market rules," Xinhua quoted the cabinet as saying.

Economists are split about whether China faces a risky property bubble. While urban property prices are rising fast, so are incomes. For that reason, some economists argue that even in Shanghai, the most expensive market in China, property is generally affordable.

Still, at the top end of the market, Shanghai remains stunningly expensive. Even the smallest apartment in the building next to Citigroup Inc.'s skyscraper on Shanghai's waterfront costs at least $6 million. The development, Tomson Riviera, boasts all-copper doors and Swarovski crystal lights in its apartments, priced around $13,750 per square meter.

Morgan Stanley economist Andy Xie is one who worries that the real-estate boom is unsustainable. He noted that even according to official figures, property investment in China is extremely high. Real-estate investment last year accounted for 8.6% of China's gross domestic product, he said, and that figure is on track to rise to 9.3% this year. That compares with 4.9% in 2000. The official data also show that the total value of property under construction at the end of last year stood at 5.1 trillion yuan ($637.42 billion), equal to 28% of China's GDP.

And those figures could be grossly understated, Mr. Xie said, noting that property data in China are so unreliable that "whatever you want to believe you can."

http://www.realestatejournal.com/