News Analysis: How will stricter control affect China's property market?

China issued stricter measures Friday to cool the heated property sector before the annual parliament session, amid public hope of pulling down soaring home prices.

The central government said in a notice that homeowners who sell their homes will be levied an income tax as high as 20 percent of the profit they make on the transaction. Prior to the new rules, income tax was 1 percent to 2 percent of the sale price.

The notice also said that local branches of the central bank in cities with soaring home prices can increase the down payment and mortgage loan interest rate for home buyers purchasing a second unit.

Zhang Xu, a market researcher with HomeLink, a leading property broker firm, said the policies will beef up tax and loan measures and make potential buyers to reconsider their purchase decisions.

For example, if a home worth of 1 million yuan (159,236 U.S. dollars) five years ago in Beijing is now sold at a price of 3 million yuan, the seller will be levied 400,000 yuan as income tax. The previous 1-percent policy just requires 30,000 yuan of income tax.

Zhang said the tax hike will increase the cost of second-hand home transactions and hit speculative purchases in the property market.

The heated second-hand transactions recently seen in several major cities will cool down, he predicted.

Chen Guoqiang, vice president of the China Real Estate Industry Association, said tax hike will force many buyers to purchase first-hand homes.

Chen said if first-hand home supplies will not increase, the growing demands will finally push up home prices.

Along with a tighter grip on second-hand homes, China has already been working to increase home supplies.

In the notice, the central government asked local governments to increase land supplies for housing and secure affordable housing construction.

Beside tax hike, a stricter control on mortgage loan is also expected to smother speculations.

Business insiders guessed that the down payment rate for a second unit may be increased to 70 percent in some major cities and loan interest rate may reach 1.3 times of the benchmark rate. But the notice did not give specific requirements.

Zong Liang, a senior researcher with the Bank of China, said increase of down payment and loan interest rates can curb speculative purchases, but authorities must work to spare those who buy a second unit just to improve living conditions.