China introduces first property tax for home buyers

Like all China's main cities, Chongqing has seen major property development

China has introduced its first property tax for home buyers to try to curb record house prices and tame inflation.

The measure, which came into effect on Friday, will apply to those buying second homes in Shanghai and Chongqing.

The tax, paid annually, is between 0.4% and 1.2% of the purchase price, depending on how the price compares with market averages.

Property prices are one of the main drivers of Chinese inflation, which Beijing is keen to keep under control.

China's economy is growing far faster than that of any other major country. Its GDP grew by 10.3% last year - the fastest annual pace since the financial crisis.

But overshadowing the growth is the worry of inflation. Prices rose to push the rate inflation up to 4.6% in December, far higher than the government's target.

'Curb speculation'

The property tax would have "a big psychological effect on potential home buyers," predicted Ge Haifeng, head of research at China Real Estate Index System in Beijing.

"China's housing market may get really quiet in coming months," he added.

In Shanghai, buyers will pay between 0.4% and 0.6% tax on their new second homes.

In the south western city of Chongqing, the tax is more staggered, ranging from 0.5% to 1.2%.

The city's mayor, Huang Qifan, said that while it was "impossible for housing prices to fall overnight because of the property tax", it would "help to curb speculation in the housing market".

Earlier this week, property development firm Shui On Group said that there was no property bubble in China, and that government curbs on bank lending were making financing more difficult for his industry.

'Change perceptions'

The ultimate aim of the tax was to prevent hoarding of properties, rather than to rein in prices, according to Michael Klibaner, head of China research for property company Jones Lang LaSalle.

"Previously there was very little holding cost for residential property because many people paid 100% cash for these properties. Now the holding cost is no longer zero," Mr Klibaner said.

"When the holding cost is zero, it's very easy to let these homes sit idle. It doesn't cost you anything to let them sit there.

"Now there's a holding cost - the hope is it will change the way people perceive real estate as an asset class."