ST : Muted response to China's 'property tax bomb'

1 Feb 2011,
Muted response to China's 'property tax bomb'
By Grace Ng

BEIJING: Days after China's first property tax was announced, the so-called atomic bomb has yet to trigger any chaotic shake-up.

The tax - billed by the local media as Beijing's most powerful weapon in its war against a property bubble and runaway inflation - has had limited impact so far since it kicked in last Thursday.

At about 7.30pm, two of China's largest cities, Shanghai and Chongqing, announced that the top command had finally given them permission - after long months of anticipation - to fire it up.

They were the first to slap a tax on high-end properties, in a pilot scheme that was expected to quickly hit other major cities such as Beijing.

But there were no fireworks thereafter, partly because of the low tax rate - just up to 1.2 per cent of home values in Chongqing, compared with 4 per cent in Singapore.

And it was imposed on only a small group of buyers, unlike in most other countries where every homeowner pays annual tax.

Thus, the property market - a big driver of China's economic growth - is not expected to crash, as the tax trial is too limited.

While Shanghai home sales fell 40 per cent last Friday from the previous day, overall prices remained stable, according to the Shanghai Real Estate Trade Centre.

And only 21 per cent of 2,300 potential homebuyers in a Shanghai online survey said the tax had convinced them to give up plans to buy a home, compared with 62 per cent who said they were either observing the situation or delaying their purchase.

It makes a mockery of the local media's wild speculation, which hailed the tax as an 'atomic bomb' and 'emergency brake' for property sales.

Doomsayers like well-known Chinese economist Lang Xianping had even warned that 'imposing property taxes will cause the economy to crash'.

Ironically, the tax has caused prices to spike in other cities. In Beijing, for example, homebuyers are scrambling to grab flats before the tax bomb hits them.

The tax aims to deter speculation, stabilise housing prices, help shift wealth from the rich to the poor and provide a much-needed new source of income for local governments, which are overly reliant on land sales for revenues.

These advantages of having a real estate tax have been bandied about since 2003, when China first started to mull over its implementation.

By making owners pay an annual levy on their property, the tax seeks to discourage speculators, by making it more costly for them to hoard empty flats until their values rise several years later, explained Professor Xie Baisan of Fudan University.

'The tax would hopefully force multiple-home owners to rent or sell their empty units to cover the cost of the levy, thus allowing prices to fall,' he said.

A tax on luxury properties would also take income from the rich to build subsidised housing for the poor.

It may solve another root cause of the overheated property market: Local governments are believed to derive as much as 40 per cent of their income from land sales. This gives them a perverse incentive to jack bids up as high as possible at land auctions. Higher land costs in turn push up property prices.

Said Mr Lang: 'The local governments and property developers monopolise the market together and force ordinary folk to buy high-priced flats - this is (volcanic) lava that could burst into flames at any minute.'

But he warned that even if a property tax was imposed, the conspiratorial bodies could still resist building low-profit housing for the poor, while passing on the tax to desperate homebuyers. This would fuel asset inflation and an economic crash.

For years, interest groups, including officials and powerful property developers, had resisted the tax, even as house prices in major Chinese cities have reportedly soared by 250 per cent since 2008.

But now, as social tensions threaten to explode amid politically sensitive inflation and a red-hot property market, China has finally pulled the trigger.

The tax trial in Chongqing and Shanghai started two weeks before the annual post-Chinese New Year house-buying frenzy kicks off, and after housing prices rose for the 19th month in a row. This will be in addition to milder cooling measures by Beijing, like interest-rate hikes.

Analysts say the tax is a step in the right direction. Said Beijing Easy Homes real estate agency researcher Li Hong: 'It will take many years to perfect the property tax system. But now that the 'bomb' has gone off, the central government can start to address the root causes of the housing bubble.'

graceng@sph.com.sg


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Some reasons for limited impact

· Low tax rate, of up to 1.2 per cent of home values in Chongqing

· Tax imposed on small group of buyers