Heavy tax to dampen speculation

20% levy on capital gains by sellers to rein in housing prices

In one of its sternest measures to hold back the rise of housing prices in major cities, the State Council, or China's cabinet, on Friday ordered that a 20 percent individual income tax be levied on capital gains by home sellers.

This is the latest regulation following the cabinet's meeting on Feb 20 about the urban residential housing market.

Currently, only a 1 percent individual income tax is levied on the sale price, much lower than the 20 percent tax on the difference between the sale and purchase prices.

"The measure will definitely lead to a sharp drop in property transactions and change people's expectations," said Ji Gang, a senior director in the investment department of real estate service provider Savills Property Services (Beijing) Co.

Meanwhile, for cities that experience soaring property prices, the branch of the central bank could further hike down payments and mortgage rates for second-home buyers, in line with the price target set by local government, the statement said.

Earlier media reports suggested that down payments for second-home purchasers were likely to be increased to 70 percent from 60 percent, and the mortgage rate could be hiked to 1.3 times the benchmark interest rate instead of the current 1.1 times. "Tightening financing is a shortcut to curb the price hike, as quite a number of bank loans in January go to property developers and individual buyers," said Ji.

Time is still needed to see if home prices will drop after those new measures, Ji added.

"If most of the potential sellers decide to give up their plans to sell properties but demand remains very strong, the price could still hardly fall," said Ji, citing a similar situation that occurred in Hong Kong years ago.

For Zhu Zhongyi, vice-president of the China Real Estate Association, first-home buyers will be the driving force for the property market after all the new measures are in place.