The government of Shanghai has announced its strictest-ever restrictions on home purchases, in a bid to cool down the overheating property market.

The new regulation to restrict the housing market takes effect immediately.

Shanghai's housing management authority says since houses are a special commodity, it's necessary to strengthen controls over the overheated property market.

Gu Jianwei, chief of the Shanghai housing and urban-rural development Commission, justifies the new rules by pointing out the city's soaring home prices, and panic buying.

上海发布房地产调控新政

"Since the beginning of the second half of 2015, over-heated and irrational sentiment mounted in the housing market, especially in the first quarter of this year. the growth of housing prices has accelerated. Investment and speculation on the market has risen also. Some new problems emerge as some companies and some insiders conduct illegal operations."

Under the new rules, home buyers will need to put down 50-70 percent of the price of a second home, compared to 40 percent previously, to qualify for a mortgage.

Shanghai has also made it harder for non-residents to buy homes in the city.

Potential buyers who do not hold local residence permits, or hukou, must have paid social insurance or taxes in Shanghai for at least five years before they can purchase property. 

Previously the requirement was two years.

The city has seen record high numbers of transactions on the eve of the implementation of the new policy.

Many residents rushed to make a deal before the new policy took effect.

The move comes after the city saw a heated performance in the housing market after the Chinese Lunar New Year. 

According to the National Bureau of Statistics, the price for new homes increased over 25 percent compared to the same period last year. 

Yi Xianrong is a senior financial researcher with the Chinese Academy of social sciences.

As to the rising qualification threshold for non-local buyers, he says the restriction in some cases may have little impact on speculators.

"If the housing price is expected to rise in the near future the restriction measures could have little effect. For example, you have to pay social insurance in the city for five years compared with the previous requirement of two years. If the speculator anticipates there will be a huge increase in housing prices, he will find a way and play tricks to change the year limit. Some speculators even fake the social insurance through hidden ways. Just as some similar cases have happened in Beijing. Beijing has seen an upsurge of social insurance after it released a similar regulation on the housing market. So the restriction has huge influence on honest people yet has little impact on gold seekers."

The researcher also points out strict implementation of the regulation can help restrict speculation.

"First one problem is the loans, the down-payment shouldn't be on loans. People pay the down-payment by borrowing money from somewhere else, if so the policy of increasing down-payment of second house purchases won't work. The authority has to intensify supervision on the case. Second, to raise down-payments of second houses can prevent many people from entering into the market. The thing is, strict implementation of the rules is a must. The housing price can be lowered only when the two elements work together."

Shanghai will also increase the supply of small- and medium-sized homes and crack down on property financing by informal financial institutions.

Some analysts expected other major cities to follow Shanghai's lead in tightening housing policies.

According to a newly released regulation, houses bought within two years will be levied a 5 percent value added tax for any transfer. 

First-tier cities such as Shenzhen, Shanghai and Beijing remain in the top three in new home price growth. 

Senior Chinese leaders have raised concerns about the country's overheated housing market in first-tier cities during an annual parliament meeting this month.

Speaking at a press conference during the National People's Congress in Beijing which ended a week ago, China's central bank governor Zhou Xiaochuan warned banks about increased credit risk amid rising real estate prices in the biggest cities.

Shanghai is the biggest city to take action in the wake of the National People's Congress.