China's property-related shares fell by the most in nearly five years on Monday on plans to tighten curbs on the housing market, though some economists predict a near-term spike in existing home prices, at least until local governments work out how to implement the changes.
The plans, announced by the cabinet late on Friday, include the stricter implementation of an existing 20 percent capital gains tax on home sales, strengthening restrictions on home buying and increasing loan rates for those buying a second home in cities where prices are rising too quickly.
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"More detailed measures will be announced by related ministries including the People's Bank of China (central bank) and local governments, so markets should definitely take the edict seriously and be prepared for falling prices of related financial assets," Bank of America-Merrill Lynch's chief China economist Ting Lu wrote in a March 3 note.
Lu said there could be a rush to buy existing homes before local governments say how they will levy the capital gains tax, but the number of deals would then slump, hitting property agencies.
A gauge of property-related stocks listed in Shanghai slumped 9.3 percent on Monday - its biggest drop since mid-June 2008. The CSI300 index of leading Shanghai and Shenzhen stocks <.CSI300> dived 4.6 percent, its steepest fall since November 2010. In offshore Chinese markets, China Resources Land <1109.HK> slumped 8.6 percent, reversing gains so far this year, in its worst session for 17 months. The stock is now down 2.4 percent in 2013 after surging 69 percent last year. The broader Hang Seng Index is down 0.5 percent this year.
"The actual impact of the new policy can be very severe or not severe at all, depending on implementation. But the wording is unexpectedly harsh,' said Yao Wei, China economist at Societe Generale CIB. "In three months time, the impact may not be big at all. But it has stirred very high negative expectations."
Local governments are expected to release their property control targets and detailed implementation plans by end-March, various Chinese media reported on Monday, citing Qi Ji, a vice-minister of housing and rural-urban development.
Friday's announcement came amid speculation about rising house prices and what additional curbs Beijing may bring in the run-up to annual parliamentary meetings that officially complete China's leadership transition. Xi Jinping formally takes over as the country's new president on Tuesday.
A private survey last week showed average home prices in China's 100 biggest cities rose for a ninth straight month in February, although the pace of increase slowed.
BofA-Merrill's Lu said the measures - a "turning point" for China's property sector - may shift demand for existing homes to new homes, and are independent of China's overall monetary policy position, which should remain supportive in the first half.
While it's difficult to predict just how local governments will implement the changes, analysts said the moves would likely accelerate consolidation in the property sector over time, with larger developers cutting prices in a market with fewer home-buying deals.
The 20 percent capital gains tax is not new, but home-owners had a choice between that and paying 1-2 percent of the property's sale price.
"While the aim of (the capital gains tax) will be to further disincentivise home purchasing for capital gain, the side-effect could be that secondary market transactions will dry up," said Lee Wee Liat, head of Asia property research at BNP Paribas, adding he was more negative on those developers over-exposed to so-called Tier 3 cities.
Property prices have risen more sharply in the larger and more developed Tier 1 and Tier 2 cities, but home buyers' sentiment will likely be affected across the board, with Tier 3 cities facing over-supply of homes, Lee said.
In an emailed response to Reuters, mainland China's biggest developer by sales, China Vanke <000002.SZ>, said it would "follow the direction of the policy and keep supporting the demands of housing."
"The market is a complicated system, so we still have to wait and see the short-term impact. The launch of the new policy confirmed central government's determination to curb prices and reaffirmed our view on periodic tightening," the company said.
(Additional reporting by Pete Sweeney in SHANGHAI and Langi Chiang in BEIJING; Editing by Ian Geoghegan)