Tax Breaks in Beijing and Shanghai to Boost Home Purchases

By Liangping Gao and Joe Cash

BEIJING (Reuters) – Beijing and Shanghai have announced tax breaks to spur home purchases as distress in the property sector continues to drag on growth in the world's second-largest economy.

Other major Chinese cities are widely expected to follow suit, and these measures come on the heels of some tax breaks on home and land transactions unveiled by China's finance ministry last week.

Beijing and Shanghai residents looking to sell an existing property will be exempt from paying the value-added tax, provided they have held onto it for more than two years, according to statements from local authorities made on Monday.

The two megacities have also raised the threshold for levying deed tax on properties to those larger than 140 square metres (1,500 square feet), an increase from the previous 90 square metres.

Chinese policymakers urgently need to address a slump in the property market, which was once a key growth driver, accounting for around a quarter of economic activity at its peak. However, a broader crisis in consumer and investor confidence has kept prospective buyers from making purchases.

The initiatives by Beijing and Shanghai have had minimal effect on boosting property stocks. China's real estate share index has lost about 1% this week, while an index for Hong Kong-listed mainland property developers is roughly flat.

These new measures come in addition to previous rule changes for the property sector established at the end of September. These included a cut in the minimum down payment ratio to 15% for all housing categories and a relaxation of home purchase restrictions.

"The policy pivot since September has been effective in reviving demand and supporting housing and stock prices," said Xu Tianchen, senior economist at the Economist Intelligence Unit. "However, China's economy is not yet on a firm footing, and policy support must be bold and sustained to restore confidence."

Zhang Dawei, an analyst at property agency Centaline, observed that confidence in the near-term prospects for the country's real estate markets had improved. "The property market in some cities, especially tier-one and tier-two cities, appears to have bottomed out, and we expect property market stabilization to be the trend," Zhang added.

However, analysts also noted that officials would need to introduce further policy support to address the broader issues affecting consumer confidence. "To reignite the growth engine of the property sector, policymakers must address residents' expectations regarding economic and income growth, and provide a more stable outlook on housing prices," stated Bruce Pang, chief economist at property consultancy JLL.

Further tax breaks announced by Beijing and Shanghai include the removal of the distinction between 'ordinary' and 'non-ordinary' housing concerning value-added taxes on property sales. Shanghai will also eliminate this distinction when applying personal income taxes on property sales. 'Non-ordinary' housing refers to properties of 144 square metres or larger, which had previously incurred higher taxes.

($1 = 7.2366 Chinese yuan)