China's real estate resale market is cooling down in the wake of recently issued government regulations designed to curb speculative investment.

 

But a leading real estate expert has stressed that market forces will remain the ultimate arbiter of the prices of new and second-hand housing.

 

Starting from August 1, a 20-per-cent capital gains tax has been imposed on individual sales of second-hand housing.

 

The levy, resulting from a State Administration of Taxation regulation issued in July, is regarded as a major blow to speculators in the overheated property market and is expected to burst the bubbles in the sector.

 

The new tax appears to have had an immediate impact in the Chinese capital, with transactions of second-hand housing falling sharply in Beijing in the first few days of the month.

 

But, according to Mark Friend, it was far from surprising that customers reacted in this way. He insists that it will "take time to understand the regulation and assess its impact on the (real estate) market."

 

Similar scenarios in other countries show that it will take time for the market to adapt to the new regulation, said Friend, the Asia-Pacific Operation Consulting Officer of Century21 Real Estate.

 

Speaking to China Daily during a recent trip to Beijing, Friend said that market supply and demand would continue to decide prices.

 

Friend's company, which has around 7,000 franchised real estate agent stores globally, currently has 776 franchised outlets in China, with around 9,000 agents.

 

Its China business reported a 17 per cent growth in transactions over the past 12 months.

 

Other countries have also experienced speculation in the real estate sector, compelling them to come up with new taxes and regulations to guide the market in a healthier direction, noted Friend. In Australia, for example, the real estate market experienced a big boom at the beginning of the decade, but started to slow down at the end of 2003.

 

This came after the authorities imposed taxes on the resale of housing and foreign investment in real estate.

 

The tax policy put off investors, while the price of second-hand housing rose due to dwindling supplies. But the law of supply and demand ultimately regained its position of influence, while the affordability of housing decided market performance, said Friend.

 

Instead of policy changes, other elements such as interest rate hikes and rising fuel prices had a greater impact on affordability, he said.

 

Of course, Australia is a developed and mature market, while China is still a developing economy with an immature real estate sector, but there is still much for China's regulators to learn from this experience.

 

The number of new real estate projects and the resale of housing have been increasingly rapidly in China as a result of the nation's rapid economic growth.

 

Sources with the National Bureau of Statistics indicated that urban investment in real estate development in China grew 24.2 per cent year-on-year in the first half of the year to 769.5 billion yuan (US$96.2 billion). The growth was 0.7 percentage points higher than the same period a year ago.

 

Housing prices in 70 large and medium-sized cities rose 5.8 per cent year-on-year in the first six months of 2006.

 

This growth was even more pronounced in Beijing, where real estate investment surged 20.8 per cent in the first six months of the year. The price of second-hand homes in the capital grew 9.5 per cent during the period, 1.7 percentage points higher than the growth in the same period last year.

 

And there remains potential for further growth, especially with the impetus from the upcoming Beijing Olympics.

 

When the growth potential lures more real estate agents to join the business, policy adjustments and a restructuring of the industry will also force them to improve services and become more professional, experts said.

 

A number of small-sized housing intermediaries will be driven out of the market, said a recent report by Century21.

 

It is good that the resale market is experiencing a "cooling-down" period and that agency services will become more mature afterwards. And the ultimate effect of the macro control measures will be decided by parallel regulations implemented by the local authorities, it said.

 

Apart from the capital gains tax, the Chinese authorities also released guidelines on foreign investment in the real estate sector last month to curb speculative overseas investment.

 

The new guidelines require overseas institutions to produce documents approving their presence in China when purchasing properties for their own use. Overseas residents who have worked or studied in China for more than one year are only allowed to buy one unit of housing for their own use.

 

(China Daily August 17, 2006)