One of China’s top parliamentary bodies has given the green light for a real estate tax to be rolled out in some parts of the country, Xinhua, the state news agency, said on Saturday.
The Standing Committee of the National People’s Congress (NPC) authorised the State Council to impose property tax reforms in certain regions.
The tax “should be levied on all types of residential and non-residential property in pilot areas” – but lawfully-owned rural homesteads and houses built on them should be excluded, it said, while noting that taxpayers will be house owners who hold land-use rights.
A property tax has been discussed for years – since 2003 – but resisted because of fear it will hit demand for homes and cause prices to drop, hurting household wealth, developers and spur a crisis for local governments ‘addicted’ to land sales because of the income it provides for their operations.
Pilot programmes were unveiled in Shanghai and Chongqing in 2011, although only homeowners with higher-end housing and second homes were taxed – at rates from 0.4% to 1.2%.
However, President Xi Jinping has thrown his support behind the latest push, which some analysts say would be a profound change to the country’s real estate sector.
The move comes at a time when the property sector has been hammered by restrictions on lending in a bid to deleverage vast debts built up over years by China Evergrande, the country’s second largest builder, and other developers, many of whom have been accused over hiding the full scale of their liabilities from public disclosure.
The sensitivity of the move can be seen in the Xinhua report, which says property tax reform must be advanced “in an active and prudent way, (to) guide the rational housing consumption” and … facilitate “steady and sound development of the property market”.
The State Council and related departments, plus local governments “need to create scientific and feasible approaches and procedures for tax collection and management”, the NPC committee said.
The pilot schemes would last for five years, once details are issued by the State Council.
The Ministry of Finance and the State Taxation Administration will draft the measures for the property tax and work in accordance with the NPC Standing Committee, officials said.
Massive Oversupply
None of this comes as a surprise, given President Xi’s now infamous remark from the 19th party congress in November 2017 that “houses are for living in, not for speculation“.
The argument underlying the NPC decision is that in recent years the property sector became irrational and in urgent need of reform as developers focused more on “churn” to fund projects all over the country. China has ended up with infamous ‘ghost cities’ and tens of millions of home units that are empty – enough real estate to house the population of France, one report claimed – and developers with dangerous levels of debt.
A tax could help curb home prices that have soared more than more than 2,000% since the privatisation of the housing market in the 1990s and created an affordability crisis in recent years.
Government leaders want to reduce the price of homes and may also be seeking to cut the scale of real estate transactions, which is now about a quarter of national economic activity.
But the plan comes at a delicate time, given the property market is currently under significant stress, with home prices starting to fall in tens of cities, and resistance from stakeholders such as local officials, who fear it will erode property values or cause a market sell-off.
Wealthier provinces
Over 90% of households own at least one home, the central bank said last year. But analysts believe the tax will bring in much needed revenue.
“Land sales are not a sustainable source of government revenue any more,” Capital Economics said in a note on Friday. “Gradual implementation should also mitigate fears that a tax could cause prices to crash.”
Analysts expect wealthier and economically more diversified regions in eastern and southern China such as the provinces of Zhejiang, Guangdong and perhaps Hainan Island will be targeted initially.
“It is expected that Zhejiang is likely to be included in the reform, especially Hangzhou,” Yan Yuejin, director of Shanghai-based E-house China Research and Development Institution, said.
Hangzhou, the base of e-commerce giant Alibaba, is China’s eighth-richest city, with economic output reaching 1.61 trillion yuan ($252 billion) last year, about 70% of Hong Kong’s gross domestic product.
A 0.7% rate is plausible, although China is likely to take a tiered approach with differentiated rates depending on the city, Julian Evans-Pritchard, senior China economist at Capital Economics, said recently.
“In the US, some wealthy counties have effective property tax rates in excess of 2%-3%, while in others it is much lower. But the average effective rate across the US is 1.1%. So it should be feasible to reach 0.7% in urban China,” he said.
A 0.7% rate would have generated 1.8 trillion yuan ($281 billion) of tax revenue in 2020 and exceeded the net land sales of local governments last year, he added.
• By Jim Pollard with Reuters.
ALSO SEE:
China pushes for property tax to rein in runaway home prices
For Xi and China Evergrande, a Delicate Balancing Act
China Officials Play Down Risk of Evergrande Spilling Over
China Media Call Xi’s Regulatory Storm a “Profound Revolution’’
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