Government measures to clamp down on property speculation have begun to produce results in Shanghai, the hottest property market in China.

New home sales, a choice indicator of market activity, have been falling since early March. The biggest drop so far was registered last Monday shortly after the central government announced further and stronger measures to "cool" down the market.

Average daily sales of new homes in Shanghai have tumbled by at least 60 percent in the past two months. On May 16, 232 units were reported sold. Figures fluctuated last week within a narrow band, between 200 and 300 sales per day. This is compared with 462 sales on May 9, and 604 on March 16, according to eHomeday, Shanghai's biggest property Internet portal.

Statistics compiled by eHomeday also show that April prices for Shanghai residential properties were down an average 9 percent to 8,097 yuan (US$978) a square meter from the previous month. The biggest fall in residential sales was in the peripheral districts, including Zhabei, Putuo and Minhang. Together, they registered an average decline of 40 percent in April.

The number of transactions in the secondary market has also dropped by 50 percent, according to Midland Realty Consultancy (Shanghai), a leading real estate agent in Shanghai.

"It is obvious that the market has been very quiet for the past several weeks," said Calvin Lau, Midland's regional director. Lau added: "Many potential buyers are holding back from making a purchase while waiting for the dust thrown up by government actions to settle. Meanwhile, more and more sellers are lowering their prices in a bid to offload their properties before the market gets any worse."

Among these keen sellers are the many speculators who are beginning to feel the intensifying pinch of the government-initiated credit crunch. What's more, many speculators are so highly mortgaged that the recent price drops have plunged some of them into the red, at least on paper.

"Government measures to curb property speculation have started to bear fruit as those speculators who could not unload their properties are now trying to rent them out in the hope of using the rental income to cover at least part of their loan servicing costs," Lau added. This, he said, has helped push down rentals of residential properties across the city.

According to Midland, supply in the secondary market has gone up significantly, causing prices to drop 15-20 percent since March.

Last week, seven key ministries and government authorities including the People's Bank of China and Ministry of Construction announced what seemed to be the most stringent measures to stabilize property prices.

According to the measures, property owners who sell within two years of purchase will have to pay tax on the full sale price, effective from June 1. The central government did not specify the level of tax but it is generally believed to be about 5 percent.

The rule is more stringent than the Shanghai government's policy issued in March. The municipal government imposed a capital gains tax on properties sold within 12 months. The 5.5 percent tax comprises a 5 percent tax on the difference between the purchase and the sale price, and a 0.5 percent construction tax.

"The market is now at a turning point," said Lina Wong, managing director of Colliers International (East China). "The strong measures aimed at clamping down on property speculation will effectively curb demand and affect sales of apartments in new projects," she added.

According to Colliers' latest survey, 65 percent of buyers investing in Shanghai property costing more than 12,000 yuan (US$1,450) per square meter were owners/occupiers, while the remaining 35 percent were investors, including some speculators.

Wong said the survey shows that the proportion of investors in the Shanghai property market is still unhealthily high, especially when compared to Nanjing, the capital city of Jiangsu Province, where the ratio is less than 20 percent.

The latest central government measures also changed the land use conditions by requiring developers to begin construction on acquired sites within a shorter period of time. Owners of land that is left undeveloped for more than a year will be taxed, while those left who leave their land unused for more than two years could have their land rights revoked. These measures could have the effect of increasing the supply of residential properties even at a time when prices are already falling.

"Developers should start getting used to the fact that it is not a seller's market any more," said Wong. "They should learn to cope with the new market conditions by becoming more cost efficient and quality conscious."

Michael Hart, associate director for research at Jones Lang LaSalle, an international property consultancy firm, told China Daily that property prices in Shanghai would likely face correction in the next six to 12 months, after which prices would rise more steadily in the longer-term.

In Beijing, however, housing prices are still high despite efforts to "cool" down the capital's housing sector.

(China Daily May 24, 2005)