Shanghai will levy a property tax on newly purchased spacious houses and expand the supply of affordable homes to curb prices, Mayor Han Zheng said yesterday.

The city aims to keep inflation within 4 percent this year, after prices rose 3.1 percent locally in 2010.

Shanghai is among a few cities that will pilot a value-based property tax to cool off sky-high home prices after previous tightening measures seem to have little effect. "The aim of the trial program is to curb speculation and protect people's interests," said Han.

"The program is a must for Shanghai, considering the city's unsustainable land resources and growing population," he added. Han didn't specify the tax rate, the space limit and other details of the tax program.

Shanghai must take this step with a long-term view to rein in the red-hot real estate market, Han told the Shanghai People's Congress.

The city is actively preparing for the trial by coordinating with the Ministry of Finance, the State Administration of Taxation and other authorities.

Earlier media reports said Shanghai and Chongqing have submitted their proposals to the State Council and are expected to impose the property tax in the first quarter of this year. Some market insiders speculated that Shanghai would tax families who have a floor area of more than 200 square meters, or above 70 square meters per person. The rate is likely to be about 0.5 to 0.6 percent.

Xu Yichao, deputy head of Shanghai Real-Estate Science Research Institute, told Shanghai Daily that the property tax could boost local fiscal incomes and reduce local government reliance on land sales to boost revenues.

Meanwhile, Shanghai will continue with existing tightening measures. These include restricting a family to buying just one new home, freezing mortgages on third-home purchase and increasing the borrowing cost for buying a second home.

"Pricing is the top priority of this year's economic work," Han said. "Complaints about high inflation and housing prices can be heard among residents. They are feeling the pinch more than the benchmark inflation indicated." The younger generation and newcomers to the city are facing pressures due to soaring home prices, Han added.

This year Shanghai will supply 5 million square meters of budget home - or 80,000 apartments - to help low-income groups.

Yesterday, 14 local lawmakers made a proposal to enact local laws to regulate the budget home sector.

Shanghai has allowed more residents to qualify for the program by increasing the maximum monthly salary to 2,900 yuan (US$439) from 2,300 yuan. Family assets per capita were increased to 90,000 yuan from 70,000 yuan.

On public rental homes with lower-than-market prices, the city has asked the State Council for instructions in regard to the management of the public housing fund to secure stable long-term capital for the program. Shanghai will offer 2 million square meters of such homes, or 40,000 apartments, for rental.

China initiated rules on real estate taxes as early as October 1986 but exempted non-commercial properties.

The prices of Shanghai's existing and new houses both rose in December despite cooling measures. The existing housing index rose for the fourth consecutive month.