Housing market shows signs of cooling after decade of growth

Higher mortgage rates, concern over impact of tax reduce volume of transactions as year gets underway

Experts say there are signs of cooling in the Chinese property market after a decade of growth, with the transaction volume starting to fall and mortgage rates rising nationwide.

Jia Kang, head of the Institute for Fiscal Science Research under the Ministry of Finance, said China's housing market also showed signs of a differentiation in prices in January, which may lead to a price slump in second- and third-tier cities, although prices in Beijing and Shanghai are likely to maintain their current level.

"Although precisely how the trend in differentiation will develop is yet to be seen, second- and third-tier cities will be more vulnerable than Beijing and Shanghai during this round of market fluctuation," he said on the sidelines of a news conference of the Hainan-based China Institute for Reform and Development in Beijing on Friday.

Jia advised investors to take care when making investment decisions.

China's real estate sector showed signs of cooling at the beginning of 2014, with most of the nation's cities recording falling transactions on both a yearly and monthly basis. Prior to that, the Chinese property market witnessed 12 years of sustained growth.

According to the real estate research institute China Real Estate Information Corp, shrinking supply and tightened mortgages played important parts in the drop in the number of transactions.

Li Wei, head of the Development Research Center of the State Council, said in a recent speech on the Chinese economy that new home construction may be slashed given the high stockpiles of homes in third- and fourth-tier cities, where supply has exceeded demand.

Li's team previously concluded in a report that housing demand will increase at a much slower pace after 2012 and demand will continue to slide under raised mortgage rates and an upcoming property tax.

Li warned about an "important change" expected to take place in China's property market after its breathtaking growth of more than a decade.

A declining market outlook was also linked by some experts to rising mortgage rates, with nearly 90 percent of 69 bank branches in 22 Chinese cities no longer offering preferential mortgage rates to first-home buyers, according to the China Real Estate Information Corp.

"We have to watch closely the trend of price differentiation in different cities, take precautions and note the role of the government in real estate control," he said, adding he believes it is highly unlikely China's property market can maintain the rises it witnessed in previous years because the environment for industrial development and the inner drive for expansion have both been altered.

Jia, from the finance institute, suggested speeding up legislation regarding property tax because more people are looking forward to the government expanding its trial to regulate the market.

In the two cities where property tax has been levied as a pilot program since 2011, individuals in Shanghai are taxed at a rate of 0.4 percent or 0.6 percent of the total price of their property annually if the housing area for each person exceeds 60 square meters. In Chongqing - the other trial city - the tax is levied only on high-end properties, such as villas, at a rate between 0.5 percent to 1.2 percent of the property price on an annual basis.

"We have to be prudent about bringing more cities into the trial and be especially cautious when drawing a watershed between homes where a tax is beneficial and those in which it isn't. Any expansion of the trial should be aimed at regulating the high-end property market, instead of levying taxes on all properties alike," he said.