Confusion Reigns Over China Property Rules

An analysis by Michael Lelyveld
2013-04-15
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A man walks past a property development billboard in Shanghai on March 6, 2013.
AFP

More than a month after announcing a new profit tax on property, China's central government has done little to clear up the confusion it has caused.

On March 1, the State Council ordered a series of steps to stop real estate speculation and make housing more affordable.

In one key measure, the government called for a 20-percent tax on profits from property sales, a sharp rise from the current 1 to 2 percent.

But the cabinet left details of the plan up to individual cities and local governments without specifying when the higher tax should be imposed.

The uncertainty created near-chaos in the real estate sector as buyers and sellers initially swamped transaction centers in an effort to escape the higher rate.

Married couples filed for divorce, hoping to avoid new restrictions on buying second and third homes for investment.

During the first week in March, 1,255 couples registered for divorce in northern Tianjin municipality alone, China Youth Daily reported, citing a fivefold increase from a week earlier.

Instead of falling, housing costs climbed as turnover soared, in part due to fears that sellers would simply tack added tax costs onto asking prices.

Last month, sales prices rose in 84 out of 100 cities, the official Xinhua news agency said, citing the China Index Academy, a commercial research group.

'Confusing'

In rare criticism from state media, Xinhua called the new rules "confusing."

"To buy or sell? This is the question that is bewildering many Chinese in the real estate market," Xinhua said.

Big cities including Beijing and Shanghai announced separate rules on home purchases, which reportedly took effect on April 1, but there still appeared to be widespread uncertainty as to when or whether the 20-percent tax would be imposed.

Confusion has been compounded by apparent conflicts in rules and press reports.

In Beijing, for example, single adults have been banned from buying second homes, according to Xinhua. But the rules also require an increase in down payments for second homes from 60 to 70 percent, the official English-language China Daily said.

In Shanghai, bank loans have been barred to residents who are trying to buy a third residence, Xinhua reported.

Some municipalities have pledged to keep the rate of price hikes for housing below GDP growth, while others have pegged it to income growth, according to state media.

Housing sector slows

It is unclear why the central government chose not to announce uniform rules, but the process has produced major tremors in the property market and fears among homeowners.

Nearly a month passed before city authorities in Beijing confirmed that sellers of single properties would be exempt from the tax hike if they had held the home for five years or more.

But the confusion may have thrown a chill into the overheated housing sector. Activity at property transaction centers fell sharply on April 1, Xinhua said.

Gary Jefferson, a Brandeis University professor of international trade and finance, suggested that the government's ambiguity may be deflating the housing bubble, whether the confusion was intended or not.

"If it's in fact creating that confusion, it may be of some benefit. It really is, in some meaningful way, deferring speculation," Jefferson said.

"If it's doing that, it's perhaps having its desired effect, as clumsy as it may be," he said.

But Jefferson argued that a tax on profits is likely to be less effective than a property tax, which imposes current costs on owning multiple homes.

Speculators only have to worry about higher profit taxes when they sell their properties at some future time, perhaps years from now.

Will policies change again?

In the meantime, tax policies may change again depending on economic conditions.

"Who knows what will actually happen when the chips are down?" said Jefferson. "But we can discount that now. Even if it is going to be a real thing, it's something to worry about in the future."

In February, Xinhua said the government was preparing to expand its pilot programs for property taxes to other cities after introducing them in Shanghai and Chongqing since 2010.

In Shanghai, the pilot tax program targets owners of multiple dwellings, while Chongqing has focused on expensive properties. Tax rates range from 0.5 to 1.2 percent, Reuters reported.

It is unclear why the central government chose to announce the profit tax so abruptly instead of testing it with pilot programs, as it has in the past with other major economic measures.

But the March surge in divorce filings suggests policymakers may have been unprepared for the social effects.

"Clearly, you don't want to be creating these unwanted incentives for socially destructive behavior," Jefferson said.