China may soon launch a trial property tax in Chongqing and Shanghai, amid the latest efforts to rein in wildly inflated property prices.

The Ministry of Finance has agreed in principle to the property tax levy in the two cities, government sources told Xinhua. The tax is designed to help enact the government's pledge of providing affordable housing.

China's real estate market remains overheated, even after a number of tightening measures last year, including purchasing restrictions, higher down payments and higher lending rates for second-home buyers.

China's central bank hiked the benchmark lending rates twice late last year, with the latest increase on Christmas day, in a bid to ease inflation pressures and deflate asset bubbles.

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Chongqing mayor Huang Qifan said in a government work report to the local legislature on Sunday that the city will impose a property tax on high-end housing.

A detailed regulation is being drafted and is likely to be enacted in the first quarter, if the government work report is endorsed by the local legislature this week, sources said.

Chongqing will likely tax all villas as well as apartments that have a floor area of more than 144 square meters and priced two to 2.5 times the average price, sources told Xinhua.

The tax will also target owners who have more than one home and have a total floor area of more than 200 square meters, sources said, adding that the tax rate may be at 0.5 to 1.5 percent.

Shanghai, however, may tax only new homes in the first quarter, the Xinhua-run Shanghai Securities News reported Monday.

Yang Hongxu, an analyst at Shanghai-based E-house China Research and Development Institute, said Shanghai may tax families who have a floor area of more than 200 square meters or 70 square meters per member. The tax rate is likely to be about 0.5 percent.

Impact

The government aims to promote healthy growth in the real estate market with the tax, said Li Zhanhong, vice president of Chongqing-based property developer Jinke Group.

The levy will not spark sharp falls in housing prices in Chongqing, as most apartments in the southwestern city are of middle- and low-end values, Li said.

Home purchases are still widely seen by the public as the best choice to maintain and increase personal assets as high consumer inflation erodes savings, said a Chongqing resident, surnamed Mao.

The tax will mainly have a psychological impact and curb speculative demand in the short term, said Yang. But in the long term, the effect will only be limited given the low tax rate, he said.

This will have very little effect on cities without the trial tax, Yang said. Meanwhile, the tax would take years to be adopted across the country, he added.

Other property-related taxes should be reduced, otherwise the property tax will only increase costs, Yang noted.

A survey by the major Chinese news portal, Sina.com.cn, showed 35.7 percent of respondents believed the tax will curb home prices. But 30.6 percent said average citizens will find it more difficult to buy homes with the rise in costs and another 30.6 said the tax will increase home prices with costs being transferred to home buyers.

Shares of property developers fell following reports of the trial property tax, driving the benchmark Shanghai Composite Index down 1.66 percent on Monday.

China Vanke, the country's largest real estate developer, dropped 1.69 percent to 8.74 yuan. Poly Real Estate, the second largest, fell almost 3 percent to 13.96 yuan.

Low-cost housing

Local governments are widely blamed for the repeated failures in cooling down the red-hot property market as a large portion of their revenues come from land sales.

With the property tax becoming a source of tax revenues, some believed that local governments may be more willing to rein in wild rises in housing prices.

The soaring prices are a major concern for urban Chinese with increasingly more finding homes unaffordable. Home prices in major cities such as Beijing and Shanghai have more than doubled over the past two years due to easy credit and low lending rates.

The proposed property tax revenues will give local governments more funds for building low-cost rental housing , which some believe is part of the solution.

Chongqing authorities have announced plans to build 40 million square meters of low-cost housing for rent by 2012.

The city sought to ensure low-cost housing for 30 percent of local residents, mayor Huang said.

"It's the government' s responsibility to meet the housing demand of low-income residents," Huang said. "The remaining 70 percent will be up to the commercial housing market."