China's commercial capital will impose a limited property tax to help curb surging prices, Shanghai's mayor says, describing good handling of housing as crucial for the city's future.

Han Zheng, who is the second most powerful official in China's biggest city, after Shanghai's Communist Party chief Yu Zhengsheng, acknowledged Friday that inflated housing costs are a serious problem for this fast-growing city of some 23 million.

Migrant laborers, who constitute about a third of the city's registered population, provide many vital services and have built most of its showcase skyscrapers, are among those worst affected. But many young, middle-class workers also chafe at the soaring housing costs.

"Shanghai is a densely populated mega-city and housing is a challenge for us and a top priority," Han told reporters following the annual meeting of the city legislature.

"If we cannot the housing issue appropriately, the city will have no future."
Housing prices in the city rose to a record average of 24,176 yuan ($3,652) per square meter in December, state media reported, up 7.6 percent from November and up 21 percent from January 2010.

Many other big Chinese cities are facing similar trends, raising worries about a financially perilous asset bubble. Nationwide, surging housing costs are also confounding the government's efforts to cool inflation that has mainly been attributed to surging food prices but is spreading to other parts of the economy.

China's inflation rate eased to 4.6 percent in December from a 28-month high of 5.1 percent the month before, according to data released Thursday, but given both domestic and international pressures could rebound.

China announced its economy grew by a larger-than-expected 9.8 percent in the fourth quarter of last year, up from 9.6 percent in the previous quarter. Heavy investments in property development and other construction helped spur full-year growth to 10.3 percent last year.

Shanghai's 2010 World Expo also brought on a building boom that has regained momentum since the six-month event, which attracted 73 million visitors to the city, ended in October.

Han said the city's agenda is focused on cooling surging prices, creating jobs and providing better social welfare and housing.

The city is gearing up to levy a property tax on purchases of newly built, luxury homes. While such a tax is unlikely to have much impact on the overall market, authorities say they expect it to help bring the market under better control.

With their investment options limited and bank interest rates lower than the inflation rate, many families use housing as way of earning higher returns on their savings. Meanwhile, the entire government is financially dependent on land sales, construction and even property investment by various state-owned entities.

The Shanghai office of the central bank has forecast that it expects housing prices to drop slightly in 2011, though the amount of transactions will remain at the same level as in 2010.

The city has also tightened restrictions, limiting families to buying just one new home, freezing mortgages on third-home purchases and raising required downpayments and interest rates charged for second homes.

Shanghai has set a target of keeping inflation within 4 percent this year, up from its 3.1 percent rise in 2010.