Property taxes in
China are a popular topic of discussion in the Chinese press. Xinhua News on January 15 stated that property
taxation, seen as a silver bullet to curb excessive growth in
China's housing prices, is causing much debate within the higher echelon of Beijing's economic planners. A controversial figure in Beijing, nicknamed "Big Mouth Ren" by the local press, stated that only when supply and demand are in balance can property
taxes really be effective in curbing speculative home purchases.
Property taxes will never curb speculation in home purchases - if they are only a one-off situation. As a January 19 article in Shanghai Daily indicated, they will do nothing to satisfy the instinct of a culture hellbent on gambling.
Property
taxation, based on legitimate appraisal valuation, is sorely needed as a means of financing those municipalities of the country where there is no more land left to sell. As a deterrent to spiraling housing prices, the
property tax concepts introduced thus far for Chongqing and Shanghai are utterly worthless. There are bubbles in
China that are now going down to fourth- and fifth-tier cities. Prices are too high in the highest tiers of cities of China.
China has more than 250 cities with populations over 1 million people, so the lower-echelon municipalities are all subject to that gambling urge just like their upper-echelon neighbors. To deflate the bubbles is obviously the goal. This is causing the research departments of the State Council some real concern.
China Daily, in a January 24 article, stated that the central government will soon expand the property
tax and home buying limitations (based on size of dwelling and the number of dwellings owned by families) to Qingdao City, Tianjin, Shenzhen, Hangzhou, Ningbo, Nanjing, Xiamen, and Fuzhou. Bubbles are already appearing in these locations.
Every year, 10 million to 15 million rural residents migrate to cities of
China. The central government believes that as many as 400 million rural dwellers will become city residents over the next two decades. Based on what I have seen in two decades living in
China, I don't think this projection is far-fetched.
A one-time
tax will temporarily deter speculative activity, but will not have a long-term effect. A shortterm capital gains tax of substance would have an impact, but I don't see that happening. The bureaucracy is simply not set up to handle the tasks necessary for either a true property
tax or a capital gains
tax.
The same day the property
tax went into effect in Shanghai and Chongqing, a new rule requiring a 60 percent down payment on all second home purchases - anywhere in
China - also took effect. I doubt it will be a deterrent. Inflation is so rampant that keeping savings in a bank in
China means you will lose money. Second homes, based on purchase price, will now require a one-time
tax (seems like an excise
tax to me) of anywhere between 0.4 to 1.2 percent of purchase price. What's to prevent bogus purchase contracts on cashonly deals? Chongqing will allow nonlocal residents to buy there - so much for curbing outside investment to keep prices down.
Taxes in Chongqing will be staggered. They will be set at 0.5 percent if homes are valued at two to three times average housing prices. Homes valued at three to four times average housing prices will be
taxed at 1 percent while anything higher will fall under a 1.2 percent
tax.
In Shanghai, second home buyers will pay a
tax of 0.6 percent unless homes are valued at less than double the average housing price. In that case, buyers will pay only 0.4 percent.
It looks like much about nothing. This also has another effect: lots of yuan renminbi making their way outside
China and affecting the economies (and housing prices) elsewhere.
