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Economy

Big Chinese cities crack down on housing speculation

New condominiums for sale near Chongqing.

SHANGHAI -- China's major cities are imposing heavier restrictions on homebuying and caps on growth in property prices, aiming to prevent speculation-fueled bubbles in urban centers as smaller cities' markets languish.

Shanghai requires parties without official residency to pay income taxes and social insurance premiums for a set number of years -- two years previously, raised to five years at the end of March -- before buying property in the city. Shanghai also lowered the maximum amount of financing buyers can take out on second homes from 60% of the purchase price to between 30% and 50%.

Shenzhen at the end of March adjusted its own required tax-payment period from one year to three years. At the end of April, Nanjing capped price increases for housing in certain areas of the city at 8-12% annually, with the 8% ceiling applying to homes priced at 30,000 yuan ($4,590) or more per square meter. Beijing's southeastern Tongzhou district has imposed restrictions on the purchase of so-called commercial housing.

China's government has repeatedly cut interest rates and loosened mortgage requirements to support the housing market since the country's economic deceleration became apparent in 2014. When the Shanghai stock market crashed in the second half of 2015, speculators plunged their funds into real estate in major coastal cities. Housing prices have surged 60% in Shenzhen and 30% in Shanghai over the past year, indicating the beginnings of a bubble.

Prices in cities surrounding Shanghai and other urban centers have seen upward pressure since spring. But many small and midsize cities elsewhere continue to struggle with high vacant housing stock resulting from past overinvestment. Inventory in cities such as Dalian and Yantai, Shandong Province, will take around 30 months to work through at current rates of sale, a private-sector survey has shown.

Meanwhile, the overall Chinese economy is becoming more dependent on property. The real estate industry grew at an annualized 9.1% in the first quarter of 2016, overtaking finance as the country's fastest-growing sector. Gross domestic product is climbing at just 6.7% in real terms, making real estate an indispensable growth engine.

In the heart of Shanghai, it is not unusual for pre-owned 100-sq.-meter condominiums to go for 5 million yuan or more. Leaving out-of-control price growth unaddressed will not only inflame discontent among residents, but could also expose the financial system to heavy strain if the market goes south. Authorities will need to strike a fine-tuned mix of policies to tamp down urban speculation while giving a boost to the ailing market elsewhere.

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