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China's property tax debate escalates
January-15-2011

Property taxes, seen as a silver bullet to curb excessive growth in China's housing prices, triggered an intense debate among economists and industry analysts recently, with some saying it may not help tame soaring prices but rather, increase costs for home buyers.

"The property tax will be a flash in the pan," warned Ren Zhiqiang, chairman of the Beijing-based Huayuan Property Co.

The 60-year-old, a controversial figure nicknamed "Big Mouth Ren" by local media, said only when supply and demand are in balance can property taxes really be effective in curbing speculative home purchases.

"In my view, China's property market is unlikely to see a supply-demand balance until a decade from now. So the tax will not be effective in taming skyrocketing prices at present," he said.

Rigid demand for housing has remained robust in China because of accelerating urbanization and industrialization. Every year, between 10 million and 15 million rural residents migrate to cities, and this trend may be continued for the next decade, experts forecast. The State Council, or China's cabinet, also anticipates as many as 400 million people would move to cities over the next two decades. ( Both the influx of populations and property speculation have pushed up China' s housing prices, prompting the government to roll out measures to control the runaway market, including increasing down payment requirements, suspension of mortgage loans for third-home purchases and, more importantly, pledging to speed trials of a property tax that might be rolled out nationwide.

Southwest China's Chongqing Municipality and Shanghai, the country's most dynamic financial hub, are among the first cities to undertake the tax trials.

Chongqing authorities said this week that the city plans to impose a property tax on high-end housing, including both new and existing homes, with a tax rate estimated at 0.5 to 1.5 percent.

Similarly, Shanghai is likely to introduce a tax in the first quarter on new homes with per capita floor space of more than 70 square meters with the tax rate expected at 0.5 to 0.6 percent. And the tax might be applied gradually to existing homes.

The levy has been praised by many analysts who said it would have a psychological impact on speculators, even if the tax cannot result in immediately reducing housing prices.

"The shock and awe approach will definitely help curb speculative demand, forcing speculators to consider costs of owning multiple flats and driving housing prices lower in the long run," believes Meng Xiaosu, head of the state-owned China National Real Estate Co.

Also, the property tax could create a sustainable source of income for local governments, which often rely on one-time revenues from selling land, said Ye Tan, a well-known economics commentator.

China's land transfer revenue soared 70.4 percent year on year to 2.7 trillion yuan (407.3 billion U.S. dollars) in 2010, the Ministry of Land and Resources said earlier this month.

Also, property tax revenues could provide funds for local governments to build more affordable housing, which proved a key to solving housing problems for low-income groups, Meng Xiaosu said.

The central government has announced plans to build 10 million units of affordable housing in 2011, almost doubling last year's 5.8 million units. Also, Chongqing authorities pledged to build 40 million square meters of low-cost housing for rent by 2012.

However, some analysts said the effect of the property tax could be limited. Chen Zhiwu, professor of the Yale School of Management, said the government should rely on monetary tools, such as interest rate hikes rather than the property tax, to curb excessive growth.

He said the value of an apartment accounts for 60 to 70 percent of a Chinese family' s total assets. Further, home purchases remain the best choice for Chinese families to maintain and increase the value of their assets, given the volatile stock market and negative interest rates which, in turn, increased upward pressure on housing prices.

Last year, the central bank boosted reserve requirements for lenders six times, raised benchmark interest rates twice and allowed a 24.78 percent gain in its currency, the renminbi.

China Friday announced reserve ratio hikes for the fourth time in two months in an effort to soak up liquidity and tame inflation.

The move was in line with Chen' s estimate. He anticipated the central bank to announce reserve requirements or interest rate increases before or after the upcoming Spring Festival, which falls on Feb. 3 this year.

The country also started to encourage citizens to directly invest abroad to diversify people's investment channels and tame accelerating inflation.

For instance, citizens of China's eastern city of Wenzhou are now allowed to make direct overseas investments of up to 200 million U.S. dollars per year, local authorities said earlier this month.