China Attempts to Prop up Property Prices

The Chinese government has just announced an array of policies, including tax exemption and mortgage deposits reduction, in an attempt to boost the falling real estate sector amid the global economic downturn.

The People’s Bank of China said in a website circular late on Wednesday that the down payment for an initial purchase of housing with a floor space of more than 90 square meters for self use could not be less than 20%. Previously, the figure was 30%. The new practice will take effect Oct. 27.

The interest rates on a mortgage for first time home buyers would be cut by 0.27% to boost domestic consumption. The floor for interest rates would be lowered to 70% of the central bank’s benchmark rate, the central bank said.

It said the adjustment was made to offset the negative impact brought about by the widespread global financial crisis and to stimulate domestic consumption amid the world economic slowdown.

The new policy demonstrated the central government’s determination to push prices up in the property market. The tax incentive can not be deemed as only to stimulate the sector of real estate, it is also part of the macro economic policy adjustment, according to Bai Jingming, deputy director of the Fiscal Science Research Institute of the Ministry of Finance.

China’s economic growth slowed down to 9.9% in the first three quarters as the spreading credit crisis dampened foreign demand for Chinese goods.

The government had recently limited bank loans for property developers in a move to restrain the runaway housing prices, but have now turned that policy around and feel that soaring property values is the only way to boost domestic consumption in the face of falling demand from overseas.

Property prices in major Chinese cities increased only 3.5% in September from a year ago, the slowest pace in over 3 years. This level of price growth is not enough to sustain a booming consumer economy.

People’s tendency to buy houses tumbled to 10-year low. Insiders said the hefty transaction costs did not restrain the property speculative activities, but refrain consumers from buying.

To facilitate house purchase for mid-and-low income families, the Ministry of Finance said that starting from Nov. 1, the stamp duty on property purchase and the VAT of land on property sales would be lifted. The contract tax would be reduced to 1% on purchase of the first unit of housing with a floor space of no more than 90 square meters.

The fiscal measures were unveiled shortly after the interest rate cuts, which showed the government’s resolution to keep pushing property values as high as possible. Bai Jingming said the new policy would coordinated with the loosening monetary policy to help boost the property market and the national economy.

The ministry said the construction of the low-rental housing would be accelerated and the subsidies for low-income families would be boosted. Living allowance for the people affected by the Sichuan earthquake would also be increased.

China has cut interest rates twice in the last month, and loosened the lending restrictions to prevent the economy from stabilizing. It also raised the export rebates to boost exports, which is the driving force of the national economy, as the trade surplus shrank 2.6%, sapped by weakening foreign demand.