China plans to introduce a property tax to help the poor

847
4
China plans to introduce a property tax to help the poor

Security guards walk into a building in front of apartment blocks in Beijing.

How is China's property tax law different in every sense to previous administrations?

The idea of levy on home owners first surfaced in 2003 but has failed to take off due to concerns that it would damage property demand and tank prices, hurting household wealth and future real estate projects and triggering a fiscal crisis for local governments addicted to land sales for income.

But the ambition by China's most powerful leader since Mao Zedong to reduce disparities between rural urbanites and ultra-rich urban poor under the banner of common prosperity may provide the needed political will to push through a nationwide property tax, currently on the legislative agenda for 2021-2020.

Average home prices have soared more than 2,000% since privatisation of the housing market in China since the 1990 s in a fast urbanised China, and in recent years an affordability crisis has resulted particularly among millennials.

The seemingly unstoppable price gains have also fueled speculative purchases sparking rampant construction, often funded by rampant borrowing that has now ensnared developers including the severely indebted China Evergrande Group - and stoked fears of wider risks to the economy.

In pilot programmes rolled out in 2011, the megacities of Shanghai and Chongqing have taxed homeowners, although just those possessing higher-end housing and second homes, at rates from 0.4% to 1.2%.

But pilots have not widened to more cities.

Richer regions are expected to introduce property taxes first, with experts identifying the expensive province of Zhejiang as one such candidate, as well as the southern boomtown of Shenzhen and the island province of Hainan.

The property tax will probably be rolled out in some cities that are not too bad at the moment for their property markets said Betty Wang, senior China economic and policy analyst at ANZ Hong Kong.

Top cities would have to do this after the lower-tier ones. A 0.7% rate is plausible, although in practice China is likely to adopt a differentiated approach with tiered rates depending on the city, said Julian Evans-Pritchard, senior China economist for Capital Economics.

In the U.S. some wealthy counties have effective property tax rates of over 2% - 3%, while in others it is much lower. The average effective rate in the U.S. is 1,1% but this rate is not an effective rate. So it should be feasible to reach 0.7% in urban China, he said.

In 2020, a rate of 0.7% would have generated 1.8 trillion and exceeded the net land sales of local governments last year, he added.

That hypothetical revenue would be equal to the size of Finland's gross domestic product.

A property tax will give local authorities a new source of income that they can reinvest in public services and infrastructure investment.

It may generate fiscal revenue equal to 70% - 80% of land sales revenues, said Lu Wenxi, chief analyst of the Centaline property agency.

If sustained, it can help local governments gradually reduce their reliance on land sales, Lu said.

But local governments may not necessarily be the ones collecting new revenue, reducing their incentive to collect such taxes, said Rocky Fan, economist at Sealand Securities.

If local governments use the funds locally, that would go against the idea of common prosperity which calls for a centralised redistribution mechanism, he said.

A property tax will increase the holding costs of real estate assets by investors. That will allow the market to purchase some housing stock from home owners, increasing supply.

As such, developers will face a slowdown in the inventory digestion rate and cash collection, further stressing their cash flow and pressuring their liquidity, said a mid-sized developer based in eastern China.

A property tax will boost the cost of holding real estate, triggering asset reallocation to capital markets, said Sealand’s Fan.

China's central bank accounts for almost 60% of urban household assets compared with 20.4% allocated to financial assets including stocks and bonds according to Real Estate; In contrast, U.S. households hold over 40% of their wealth in financial assets.

In the end, taxy people don't want someone to buy into a property. Instead, they will allocate their money else, in capital markets, benefiting companies, Fan said.

Although the tax would blunt the short-term effects on China's property market in the long term, careful implementation is needed to diffuse the financial risks, he warned.

You need to give the market time for digest, and answer to the policy. A stampede would cause a property price crash, which would endanger all the financial health of the world's poor.