China tightens curbs on lending, plans tax in renewed effort to cool housing prices

By Elaine Kurtenbach, AP
Thursday, September 30, 2010

China curbs lending in move to cool housing market

SHANGHAI — China has tightened limits on mortgage lending and plans to roll out a new tax on home sales, acting once again to cool a property market that some fear is frothing into a bubble.

The required downpayment for a first home purchases rises to 30 percent, up from 20 percent, while purchases of second homes will require a 50 percent downpayment, up from 40 percent. Loans for purchases of third homes are banned, said the announcement on the government’s website.

In line with many investors’ expectations, the government also said it would introduce a trial property tax in some major cities. Shanghai, Beijing, Shenzhen and Chongqing are expected to be among the cities where the tax will be rolled out first, state media have said.

The moves reflect growing unease over the failure of repeated efforts to fully bring under control a property market that has shot out of reach of most ordinary Chinese and is viewed as a threat both to political stability and to the financial system.

Though China’s overall economy has entered what many economists are calling a “soft-landing,” with forecasts for roughly 9 percent growth in the last quarter of the year, real estate remains a wild card.

“The housing problem affects people’s livelihood and apart from being an economic problem also affects social stability,” the government statement said. “Excessively high housing prices make it difficult for families to find homes, increase financial risks and are an obstacle to coordinated economic development.”

Authorities have sought repeatedly to cool the market by discouraging housing purchases for investment purposes, particularly speculative buying, that has helped drive prices out of reach for many city dwellers.

The recent gains in the value of China’s currency, the yuan, are also believed to be drawing in illicit flows of investment from overseas, adding to upward pressures on prices.

“Together, the yuan’s appreciation and booming housing prices are thought to have contributed to the frothiness in the property market, perhaps risking an inflationary spiral or financial crisis,” said Hui Qiangjian, a senior researcher at E-house R&D Institute in Shanghai.

The newest actions followed news that real estate dealings had surged since mid-August, pushing prices higher. Overall, housing prices in 70 major Chinese cities rose 9.3 percent in August from the year before.

In some cities prices are spiking to new records: The average price per square meter for an apartment along Beijing’s Fourth Ring Road, on the city’s outskirts, is about 34,000 yuan (nearly $5,100), according to city government statistics.

That compares with an average annual per capita income of less than 30,000 yuan ($4,500) and much more modest income of 12,000 yuan ($1,800) per capita for the lowest fifth of urban dwellers.

“By putting economic stability ahead of people’s financial gains, the restrictions may, hopefully help cool the prices in the short term,” Hui said.

The government is also seeking to discourage property developers from hoarding land, or newly built housing, thus constraining supply, while waiting for prices to rise further.

Since worries over what the government might do had been weighing on investor sentiment, the relatively moderate new measures relieved some of that concern, and prompted a round of bargain hunting following recent sell-offs of property shares.

Share prices for major developers surged, with Poly Real Estate up 8.9 percent to 12.36 yuan. Industry leader China Vanke jumped 7.6 percent to 8.40 yuan.

The benchmark Shanghai Composite Index, meanwhile, gained 1.7 percent to 2,655.66.

Associated Press researcher Ji Chen contributed to this report.

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