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China Lowers Taxes, Blocks Land Sales in Attempt to Boost Housing Markets

2016/02/22 by Michael Cole Leave a Comment

Jiang Daming

Jiang Daming is likely to be lose a few popularity points with the mayors of China if his new rules are implemented

China’s central government is aiming all of its bureaucratic weapons at the housing market in the early months of this year, to add some spark to one of the traditional engines of the mainland economy.

The latest evidence of this determination came in a pair of measures revealed since markets closed on Friday, including cutting taxes on some home sales by as much as two-thirds, and placing new limits on the ability of local governments to sell land in cities where there is an overhang of unsold housing.

This weekend’s moves follow just two weeks after China lowered downpayments on home purchases for the third time in the last 12 months. All of these efforts to boost the housing sector come after growth in real estate investment slid to just one percent last year, according to official figures.

Two Ministries Team Up to Stimulate Home Sales

China unsold homes

China’s latest measures continue to take aim at cities with large supplies of unsold homes

China’s Finance Ministry got the weekend assault on slowing home sales started by announcing on Friday afternoon that the transaction tax on purchases of second homes smaller than 90 square meters will be cut to one percent from three percent, effectively giving a two-thirds tax cut to buyers of starter homes and middle-class families.

For deals involving second homes of over 90 square metres, the tax will be cut to two percent, while the tax on first homes of over 144 square meters will fall to 1.5 percent from three percent.

All of the new rates will take effect on Monday, February 22nd, however, like other recently introduced measures, the lower transaction tax rates apply only outside of the first tier cities of Beijing, Guangzhou, Shanghai and Shenzhen, where housing prices have continued to climb amid strong demand.

On February 2nd, China had already lowered downpayments on purchases of new homes by first-time buyers from 25 percent to 20 percent, in an effort to boost sales. The same measure also lowered downpayment levels from 40 percent to 30 percent for buyers of second homes. The lower downpayment levels, like the latest tax reductions, exclude transactions in the country’s first-tier cities.

This determination to sell homes in China’s smaller cities is fuelled by a record supply of seemingly unwanted housing. The country’s inventory of unsold homes rose 11.2 percent in 2015 to reach a total of 452.5 million square metres, according to the National Bureau of Statistics.

Land Ministry Jumps in to Stifle Supply

This backlog of unsold homes is concentrated in China’s small cities, where a slowing factory economy and a few years of irrational exuberance among developers and the local governments that sell them the land have combined to create large swathes of empty housing.

To keep developers in check, China’s Ministry of Land and Resources now says that it is clamping down on land sales and will reward communities that sell down unsold inventories.

A report today on state-run CCTV indicated that Minister of Land and Resources Jiang Daming has declared that his department will halt land sales in cities with high levels of unsold homes, according to an account in the South China Morning Post.

Jiang is also said to be planning higher allocations for land sales in cities that make progress in cutting housing backlogs and that have allowed migrants to purchase urban homes.

Most local governments in China rely on land sales for the bulk of municipal revenues, a syndrome that has incentivised community leaders to keep selling more land, even if more homes are not needed.

If implemented as stated, the Ministry’s new measure is likely to face fierce resistance from local governments which will be hard-pressed to find replacements for their lost land sales revenues.

China’s government appears to be under increasing pressure to improve economic performance in recent months, after the country’s top line GDP growth slowed to a 25 year low of 6.9 percent in 2015. Traditionally, real estate investment has accounted for at least 15 percent of the country’s economy, with the sector supporting many other industries as well.

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Filed Under: Research & Policy Tagged With: crebrief, highlight, home sales, Jiang Daming, Ministry of Land and Resources

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