Monday 5 January 2009
Beijing Eases Sales Tax to Lift Property Market
Tax deductions or exemptions have been added to cuts in the flat rate of taxes levied on property sales on the mainland in a bid to stimulate the floundering market, but analysts believe the measures will have only a marginally positive effect and that more relief is in the pipeline.
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Beijing Eases Sales Tax to Lift Property Market
Fulton Mak
5 January 2009
Tax deductions or exemptions have been added to cuts in the flat rate of taxes levied on property sales on the mainland in a bid to stimulate the floundering market, but analysts believe the measures will have only a marginally positive effect and that more relief is in the pipeline.
Last month, the State Council announced easier access to second home mortgages and a cut in the property transaction tax to further boost demand for properties.
Under the new policy, the resale lock-up period during which a 5.5 per cent tax on early sale is levied, is shortened from five years to two. For properties resold within two years, the tax base shifts from the sales proceeds to the profit earned on the sale.
As a result, transaction costs for those who hold properties for two to five years will drop 5.5 per cent. Costs for those who resell properties bought in the past two years will also be lowered, subject to how much profit they make.
Beijing had previously introduced a series of tax incentives to stimulate demand. Over the past three months, it has lowered deed tax to 1 per cent from 1.5 per cent for first-time buyers of ordinary housing units smaller than 90 square metres. It also suspended the stamp duty and land appreciation tax on individual housing transactions.
Analysts at Citi Investment Research say the new measures “should help neutralise the negative sentiment in the housing market in China and stop the downward spiral in the housing market from accelerating”. Some believe the move can simulate investment demand for properties.
However, CLSA head of China and Hong Kong property research Nicole Wong believes the move will be only marginally positive.
“It is flagging confidence among Chinese homebuyers, not the increase in marginal savings from buying a home, that will drive the property market’s momentum,” she said.
Concerns about the deteriorating job market, decreasing income or layoffs would continue to hurt consumer sentiment and market transactions, said Ms Wong.
Goldman Sachs said although the measures would help improve liquidity in the housing market, the likely sudden supply increase in the secondary market would crowd out demand in the primary market and put pressure on developers in the near term. It expected a limited positive implication from the change.
Rumours that a tax rebate is being considered are also circulating.
Chongqing vice-mayor Huang Qifan said earlier this month that the city government was considering granting first-time homebuyers a tax rebate similar to the one implemented by Shanghai from 1998 to 2003.
Using Shanghai’s tax rebate policy as a reference, Credit Suisse estimated the tax rebate would allow a homebuyer with 10,000 yuan (HK$11,341) monthly household income to save 6 per cent on house price. It said the benefit to the higher-income class would be more significant as China has adopted progressive taxation.
The Shanghai tax rebate allowed homebuyers to claim income tax deductible up to the total amount equal to the home purchase principal and the interest component for up to five years, which proved to be successful in stimulating the market, Credit Suisse said.
Lee Hing-yin, a director of research and advisory at Colliers International, East China, said the preferential policies were conservative compared with those issued in 1998 and did not meet market expectations. Thus, there was room for further supporting policy, he said.
However, he added that worsening global market conditions and the increased openness of the mainland economy had made the country more susceptible to external changes and this would curb the effectiveness of the policy.
Mr. Lee said with the domestic economy and market fundamentals stronger than they were 10 years ago, some benefits would flow from the policy measures.
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