Incentives to Boost Ailing Real Estate

By Ren Yujie
Published: 2008-10-23

The Chinese government has announced a series of tax cuts and credit easing for first-time home buyers on October 22.

While the market viewed it as a move to prop-up the sluggish real estate industry, the authorities stressed it was to ensure the housing needs of mid-and-low income families.

From November 1, the stamp tax on property purchase and the value-added tax of land on property sales would be lifted. The contract tax would also be reduced to 1% from 1.5% for first-time home buyers of units with a floor space of no more than 90 square meters. The measures were announced by the Finance Ministry in a notice posted on its website.

The People's Bank of China, Chinese central bank, also issued a circular online the same day, announcing that the minimal down payment required for first-time home buyers of units with a floor place no more than 90 square meters would be reduced to 20% from the previously 30%.

The Central bank also cut the mortgage interest rate for first-time home buyers by 0.27 percentage points to boost domestic consumption. The floor for interest rates would be lowered to 70 percent of the central bank's benchmark rate. These new central bank rulings would take effect on Oct 27.

In the past weeks, speculations were abundance among Chinese real estate industry players, who expected the central government to introduce incentive measures to stimulate housing consumption to boost the sharp decline in property trading volume.

Prior to that, 18 local municipal governments across China had already announced tax cuts, loosening credit, and offering subsidies to save the ailing local real estate market, which had hurt related business sectors and local governments' revenues in taxation and land transfer fees.

The consumers, on the other hand, complained that property prices remained high despite contracting trading volume. Latest official statistics revealed that in September, despite slower demand for houses, property prices in 70 major cities across China had gone up by 3.5% compared to the corresponding period last year.

The slump in real estate had continued for several months as global economic woes worsen and China's growth rate slowed. For the first three quarters of this year, the country's gross domestic product (GDP) growth rate was 9.9%, it was the first time in five years that the growth rate had gone below double digit.

In the meantime, the burden for spending had increased as China was wrecked by several major natural disasters this year, requiring bigger government budget for rehabilitation. Latest official data revealed that government expenditure had grew by 11.6% in September compared to the same period last year, while government revenues for the same period only grew by 3.1%.

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