China Cancels Property Tax Plan

An analysis by Michael Lelyveld
china-wanjing-cityscape-beijing-dec5-2015.jpg The Wangjing SOHO (rear C) curvilinear, asymmetric skyscraper complex is surrounded by clusters of residential apartment buildings in Wanjing, a suburb of China's capital Beijing, Dec. 5, 2015.

After seven years of studying a key measure to tame soaring property prices, China's government has backed away from implementation due to fears that the real estate bubble could burst.

Prior to China's annual legislative sessions in early March, analysts and officials predicted that the National People's Congress (NPC) would enact a nationwide property tax that has been under consideration since at least 2010.

Top officials of the Ministry of Housing and Urban-Rural Development indicated that the NPC was poised to pass the landmark tax law aimed at curbing speculation in the housing sector.

"It is a major task in China's tax reform determined by policymakers, and the lawmaking process will be accelerated," said Vice Minister Lu Kehua, the official Xinhua news agency reported on Feb. 23.

But one day before the start of the NPC sessions, a spokeswoman said there was "no plan to submit a property tax bill to lawmakers for deliberation this year."

"There have been a lot of discussions on this issue, as such a bill involves a wide range of interests," said Fu Ying, according to Xinhua.

The report noted that a commitment to the tax law was part of the sweeping reform plan approved by the Third Plenary Session of the 18th Communist Party of China Central Committee in 2013.

"However, in a year when the ruling Chinese Communist Party (CCP) will see a top-level reshuffle at its 19th Party Congress, observers have dismissed the likelihood of such a measure for it could destabilize the economy," The Sunday Times of London said.

The reversal is important because the property tax has been seen as one of the few ways to deter speculative buying of multiple dwellings by well-heeled investors and families with savings seeking higher returns.

The practice of investing in unneeded properties has flooded the market with empty apartments and pushed home prices out of the reach of the poor.

But after years of preparation, the government has apparently balked at its own reform plan.

"This goes against the grain of what we thought way back in 2013 was the direction originally announced by the authorities," said Harvard University economics professor Dale Jorgenson.

"They don't seem to be able to carry this out," Jorgenson said in a phone interview.

Tax pilot programs

Since plans for the law were announced by the previous government of former President Hu Jintao and Premier Wen Jiabao, limited tax measures have been put in place under pilot programs only in the cities of Chongqing and Shanghai starting in 2011.

The taxes on high-end and multiple properties are meant to raise the cost of holding onto empty units for investment purposes. Housing speculation has been blamed for unnecessary building, double-digit price hikes and pollution in first-tier cities like Beijing.

"Houses are built to be lived in, not for speculation," President Xi Jinping said last year in a statement that has become a government slogan.

But instead of a national tax, the government has tried to discourage speculation by ordering cities to devise their own individual disincentives for buying second and third homes.

The result has been a patchwork of local rules covering higher down payments, mortgage histories and residency requirements, driving investment from one city to another.

Last month, dozens of cities took steps to limit housing purchases with a wide variety of differing rules and qualifications, according to Xinhua reports.

While property sales and building have boomed in big cities like Shenzhen, third-tier and fourth-tier cities have faced a glut with millions of unsold homes.

Local measures announced on March 17 by Beijing and three other big cities include increases in down payments from 50 to 60 percent of the sales price for second homebuyers.

The official English-language China Daily said that some buyers in Beijing would have to make a down payment of at least 80 percent for properties valued at more than 4.68 million yuan (U.S. $680,000).

In another step aimed at slamming the door on price hikes in the capital, Beijing authorities announced punishments against six projects and 15 real estate agent offices for selling "business apartments" to individuals as residences, Xinhua reported on March 27.

In another abrupt rule change to restrain prices, the southern city of Guangzhou announced Friday that sales of both new and existing homes would be prohibited if held for less than two years.

State media have cited National Bureau of Statistics (NBS) data as evidence that the municipal measures are working.

In March, Xinhua reported that the market had "stabilized" after the NBS found that more than half of 70 surveyed cities registered month-to-month price declines for new housing in February or increases of less than 0.5 percent.

The tortured reading was contradicted by a Reuters analysis of the same NBS data showing that the pace of average increases actually rose in February to 0.3 percent from 0.2 percent a month before.

RFA's review of the data found year-to-year price decreases in only 3 of the 70 cities with increases of more than 22 percent in Beijing, 23 percent in Guangzhou, and 21 percent in Shanghai.

Last month, the NBS reported a surprisingly strong 8.9-percent growth rate in real estate investment for the first two months of the year, topping industry forecasts.

Investment in residential properties rose 9 percent, while floor space for new construction climbed 14.8 percent, suggesting that the local rules have had little effect.

A billboard promotes a new luxury residential home in Beijing, March 7, 2014.
A billboard promotes a new luxury residential home in Beijing, March 7, 2014.
Credit: EyePress
Li remains silent

Although the government has pushed the national property tax as a more effective measure for years, Premier Li Keqiang had nothing to say about it in his annual work report to the NPC.

"We should better regulate housing development, marketing and intermediate services, and keep home prices from rising too quickly in popular cities," Li said.

Cities under pressure from rising prices "need to increase as appropriate the supply of land for residential use," Li said.

In the past, local governments have been criticized for relying too heavily on land sales for revenues. Property taxes were originally proposed as an alternate revenue source.

Years later, the idea of adding more land to overheated property markets may only encourage the speculative binge in an economy fueled by excess liquidity.

"Most cities, including the large ones, have an extra supply of land now. It's not as if there's some kind of land shortage that is driving this up," Jorgenson said.

The removal of the tax law from the NPC agenda suggests that the government has abandoned the plan as a solution for good.

The reversal is a sign of the government's increased concern with risks and "asset bubbles" in the economy as it focuses on stability at a time of declining economic growth.

Although slowing the price hikes remains a primary mission, the introduction of the property tax raises the risk that the bubble could deflate rapidly, putting pressure on the economy.

Jorgenson says the risk is one that the government should take, since the alternative is to rely on a thicket of local measures as prices keep rising.

He notes that speculative construction and unneeded development have contributed to excess production of power-intensive products like steel and cement that have been blamed for China's smog crisis.

By relying on inconsistent local regulations, the central government is continuing to allow interference with market forces.

"This is too complicated. Every time you turn around, there's some bandage pasted on this wounded system," said Jorgenson.

"The only way to deal with this is through markets, including land markets. And once you get to that point, then I think you immediately come to a property tax," he said.

Add comment

Add your comment by filling out the form below in plain text. Comments are approved by a moderator and can be edited in accordance with RFAs Terms of Use. Comments will not appear in real time. RFA is not responsible for the content of the postings. Please, be respectful of others' point of view and stick to the facts.

View Full Site