After years of soaring real estate prices, the Chinese government now finds itself in the rare position of lowering taxes on the cost of buying a house in China as the domestic property market begins to fall victim to the negative economic trends now affecting the globe.

In measures targeting those buying their first home in particular, the Finance Minister has announced that property contract tax will be lowered to 1% on purchases of dwellings that are smaller than 90 square meters. Under current rules, a 1.5% tax is paid on houses smaller than 140 square meters, with a 3% tax levied on other properties.

The government has also decided to lift stamp tax and value added tax on property purchases. All measures are set to take effect on November 1.

In another step designed to encourage more people to step onto the housing ladder, the country's central bank has relaxed mortgage lending rules for banks dealing with first-time buyers.

While the real estate market is still relatively buoyant in China compared with major developed economies such as the US and the UK, property price growth has slowed considerable in recent months. Recent figures show that property prices in 70 Chinese cities increased 3.5% year-on-year in September, but this was the slowest rise in three years.

High transaction costs, including taxes, have been cited by the property industry as a major factor in the slow-down and Beijing's move to cut taxes is designed to encourage those on more modest incomes to buy houses, rather than foreign investors, who have largely been to blame for astronomical property price rises in recent years.

Before the credit crunch exploded into life in mid-2006, central and local governments were in fact raising taxes on the property sector in order to avert the potential bursting of a rapidly growing real estate market bubble. For example, Beijing announced in 2006 that the government would begin to actively enforce capital gains tax rules, which up until that point had been easily by-passed by investors. Earlier that year, the Land Use Department of the Ministry of Land and Resources announced plans for a heavy tax on second homes to curb rampant house price inflation and ensure that homes remained affordable for Chinese workers.

SV Development