China's previously booming real estate market has slowed down since the government introduced a property business tax from the beginning of last month.

There are no nationwide figures available for average prices, but other indicators suggest that both sellers and buyers are holding back from making new deals.

Sellers want to defend their profits, and the average real estate price has been falling in many big cities. Buyers, however, are waiting to see how the market will change before committing themselves.

A joint investigation team with representatives from seven key government departments finished a national inspection a few days ago that checked the effectiveness of the government's macro-control policies.

Although their report has yet to be unveiled, other survey shows the property sector is not as hot as before.

According to the State Administration of Taxation, the government's real estate policies have been successful.

The increasing speed of investment in real estate development in the first five months has slowed down by 2.3 percent from the figure for the first quarter.

The number of luxury residential houses that have been sold has shrunk dramatically. Turnover in 16 big cities even registered negative growth in the first five months of this year.

The national average house price maintained moderate growth, with the speed at which prices rise falling 1.6 percent in the first five months, compared to the first four months.

Real estate speculation and investment has almost stopped and demand is becoming more and more reasonable.

A business income tax of 5.5 percent was introduced on June 1 on houses that were sold on less than two years after they were bought.

And for luxury houses held above two years, a 5.5 percent tax was levied on the difference between the purchase and selling price.

According to the latest survey from the National Bureau of Statistics of China (NBS), the national real estate climate has cooled down. Confidence among real estate developers also decreased.

"I think the current market is in a deadlock," said Pan Shiyi, a prominent real estate developer. The turnover from his Beijing projects has fallen by 70 percent from April, he said.

The deadlock will not exert great influence on developers with adequate capital flow. But it is real torture for developers with capital difficulties, he said.

Property turnover in Shanghai plummeted by 80 percent in the second quarter from the first quarter, according to Shanghai Real Estate Trade Association.

But house prices differ depending on the city, said Wang Deyong, a real estate analyst at CITIC Securities.

For Yangtze River Delta cities, such as Shanghai and Hangzhou, house prices could fall more than in other cities, he said.

From October last year, house prices in the two cities increased by 30 percent while the cost to build them remained almost the same.

The price bubble due to speculation will decrease gradually, but it needs time for the market to make the adjustment, he said.

Experts also said local governments' joint efforts are needed to maintain a healthy real estate market.

Local governments have a direct interest in the property market. Income from land sales is the second biggest earner for local governments. Statistics show local governments received 910 billion yuan (US$110 billion) from land sales between 2001 and 2003.
Real estate tax is also another big source of income.

Even of the central government tries hard to curb the overheating property market, these measures can be effective only if they are firmly carried out by local governments, said Zhang Yan, a real estate analyst at China Securities.

After the central government announced the macro-control policies, some local governments released their own complementary measures to curb runaway house prices. Some of them are having an effect.

In Shanghai, although not all property projects registered sharp falls in prices, some projects have witnessed big declines.

The average price of Da Hua Graceful Oasis, a project in Shanghai Pudong New Area, fell to 9,000 yuan (US$1,088) per square meter from 13,000 yuan (US$1,572) per square meter two months ago.

While in cities such as Beijing and Shenzhen, there will be little room to fall because prices have been comparatively stable, according to the analyst.

From the nationally point of view, house prices will see moderate increases, according to Wang Mingliang, an official of NBS.

Chinese people's housing demand is great and the price of building materials will not fall. Moreover, land is a main income source for local governments. And most of developers' funds are bank loans. A sluggish market will put the banks at risk, the official explained.

(China Daily July 12, 2005)