China faces a significant challenge as local governments have failed to please home buyers by rolling out home price control targets linked with economic growth or disposable income growth.
“Local governments have to make a tough choice between netting revenues from selling land to property developers and curbing home prices, as they were asked to do by the central government,”
said Cao Honghui, a senior researcher from the Institute of Finance and Banking under the Chinese Academy of Social Sciences.
Earlier this year, China’s central government asked local governments to set new targets for controlling housing prices for 2011 before April 1.
With the public anticipating falling prices, 100-plus cities posted their targets as asked, seeking to link the targets with gross domestic production growth and disposable income growth.
Only the municipal government of Beijing clearly promised to maintain the home price stable or even lower than the current level.
The increasing role of real estate in local economies and public finances justified local governments’ choices, said Cao.
Local governments have been increasingly relying on property sales for funding. China’s property sales increased 70.4 percent from year to year to reach 2.7 trillion yuan (412 billion U.S. dollars) in 2010, said authorities from the Ministry of Land and Resources (MLR) earlier this year.
The State Council, or China’s cabinet, wants a public promise from local authorities to regulate housing prices in a bid to slow down the expanding real estate bubble and decrease prices.
By the end of 2010, property prices nationwide had posted 19 months of consecutive year-on-year increases. While December’s price growth of 6.4% was far lower than April’s record high of 12.8%, prices continue to creep up in month-on-month terms.
At the end of January, the central government allowed Shanghai and Chongqing to levy taxes on property holdings. Such a tax had been talked about for years – particularly at the height of the property bubble in 2007 – but plans were shelved repeatedly due to uncertainties over implementation and concerns about how the market would react.
With a tax rate of up to 0.6% in Shanghai and of up to 1.2% in Chongqing, the results so far have been unclear. The tax was announced ahead of the Lunar New Year holiday – the off-season for the housing market. A surge in purchase agreements before the tax came into effect was followed by a lull in sales as potential homebuyers waited to see how it played out. By mid-February in Shanghai, sales had fallen up to 8.6% week-on-week.