August 17, 2021

Asia

CHINA: This time is different? Signs of progress on long-awaited property tax

BY Gabriel Wildau

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( 6 mins)
  • Political obstacles have stalled progress on a property tax for over a decade, despite a broad consensus among technocrats and official promises by the Communist Party leadership.
  • But recent policy signals, combined with a more favorable political and economic context, suggest that progress is likely over the next two years.
  • Ultra-expensive regions where housing speculation is rampant, like Shenzhen and Hainan, are the most likely candidates for the first round of new trials.

For the last decade, a property tax has been something like a holy grail for Chinese economic policy. Academics and technocrats widely agree that an annual tax based on the value of land and buildings would address a series of interrelated problems in the economy. Chief among these is rampant housing speculation: by some estimates, a fifth of China’s urban housing stock is empty. Housing in Beijing, Shanghai, and Shenzhen is among the world’s most expensive based on price-to-income ratios. China’s household debt levels have risen sharply in recent years, due primarily to mortgage debt. Beyond mortgage debt, the broader financial system is also highly exposed to risks from a property bubble, both through loans to indebted developers like Evergrande and through corporate loans, which are typically collateralized with property. Meanwhile, local governments, which lack stable streams of fiscal revenue, relying instead on land sales, which creates incentives to manipulate the land supply to keep prices high.

Decade of delays

Despite the policy merits, the politics of the property tax have been challenging. The importance of housing to China’s overall economy makes policymakers reluctant to adopt any policies that might trigger a drop in prices. China’s homeownership rate is high by international standards, housing accounts for 70% of total household wealth, and political elites often own multiple flats. A large and powerful constituency therefore naturally opposes any policy that threatens property values. Implementing a tax also requires a comprehensive registry of property ownership, which could expose embarrassing truths about official corruption. There are also legal obstacles: Chinese law forbids local governments from levying new taxes, so new legislation is required to empower localities to impose a tax.

A property tax was ostensibly on China’s policy agenda for most of the 2010s. Pilot programs began in Shanghai and Chongqing in 2011 but were never expanded. In its widely heralded Third Plenum decision in 2013, the Communist Party leadership pledged to enact property tax legislation, but like other elements in that ambitious blueprint for economic reform, this pledge went unfulfilled. The 13th Five Year Plan, which covered 2016-2020, similarly called for “advancing” property tax legislation, and the National People’s Congress (NPC) added property tax legislation to its multi-year agenda in 2015, indicating that it should be completed before the term ended in 2018. Lawmakers reportedly completed a draft of this legislation in 2016, but it was never published, and the NPC never formally reviewed it.

New signs of progress

Several recent signs indicate that real progress on a property tax may finally be at hand. In May, the finance ministry broke a two-year silence on the issue, announcing that it had convened a forum on property tax trials with the NPC Standing Committee’s Budget Work Committee, the Ministry of Housing and Urban Development, and the State Administration of Taxation. The participation of multiple stakeholder agencies suggests a degree of political consensus that was previously lacking. The 14th Five-Year Plan, released in March, repeated the 13th’s call for advancing relevant legislation. This item also appears on the NPC’s long-term legislative agenda covering 2018 to 2023, though not on the single-year agenda for 2021.

The broader political and economic context has also changed. The government launched a property registry system in 2015, and it was completed in 2018, with the rollout period giving officials time to dispose of illegally obtained flats. President Xi Jinping’s anti-corruption campaign, which peaked around 2015, had a similar impact. Progress on property tax legislation might have occurred in the 2018-2020 period, but the US trade war and then Covid-19 created unexpected risks to economic growth that policymakers apparently did not want to exacerbate.

Now China’s economic growth is on a firmer foundation. What the Politburo called a “window of low growth pressure” allowed policymakers space to tackle structural issues this year – like regulation of the technology sector. Last month signaled a modest shift towards policy easing, amid signs that growth is slowing, but the Politburo singled out property as an exception to the general easing stance, signaling that efforts to restrain housing speculation will continue.

Cooling speculative activity in the housing market also has a new political impetus from Xi’s pledge to achieve peak carbon emissions by 2030. In March, production curbs on steel intended to reduce energy consumption triggered an alarming spike in steel prices. This incident demonstrated that preventing price spikes requires matching supply cuts with corresponding measures to reduce steel demand, which comes mainly from the construction sector.

Outlook

The next step will likely be property tax trials in new cities. Those with the worst affordability indicators and the clearest signs of speculation, such as Shenzhen and Hainan, are the most likely candidates. The new taxes will naturally hurt prices in the affected cities, though prices in other cities could rise as speculators re-position to avoid the tax.

Any property tax phase-in will be gradual, with rates starting low and coverage targeted at speculative buyers and luxury properties. The Shanghai trial offers a possible model. The annual tax rate is 0.4-0.6% of the purchase price, depending on price and floor area. First homes owned by those with a local residence registration ( hukou ) and flats smaller than 60 square meters are exempt. Chongqing’s pilot focuses even more on high-end properties, covering only high-priced districts of the city, with the rates ranging from 0.5-1.2%.

Even in an optimistic scenario for progress on a property tax, it may not little meaningful macro-economic impact for at least five years. The Shanghai and Chongqing pilot programs did little to restrain spectacular price rises there, likely because rates were too low. In both cities, property taxes contribute 5% or less to total tax revenue. Still, relative to the previous decade, recent signals suggest reason for optimism.

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