Appartments in Shenzhen, where the average home price last year was 41 times the average income © Bloomberg
As Chinese authorities struggle to contain runaway home prices, a long-awaited plan for a property tax has stalled, the latest sign of entrenched interests impeding efforts to transform the country’s growth model.
The average price of a Shenzhen home last year was 41 times the average income, against 29 in London, 23 in Tokyo and 15 in New York, according to Macquarie Securities. Since late last year, 45 Chinese cities have introduced purchase limits and other measures in a bid to cool rising property prices.
For years, economists have advocated for China to move away from administrative tools like purchase bans in favour of a property tax. Top Communist party leaders committed to imposing a property tax in a landmark blueprint for economic reform approved in November 2013.
By imposing an annual levy on home ownership, a property tax would reduce the appeal of housing as a speculative investment. While the merits of property taxes in general are a matter of debate among economists, few doubt that is sorely needed in China, where 50m homes lie empty lie empty, according to the China Household Finance Survey conducted by researchers from Southwestern University of Finance and Economics in Chengdu.
Yet market observers say there is little prospect of the government implementing a tax within the next few years — at the annual session of China’s rubber-stamp parliament in March it was announced that legislation for the levy was not on the agenda this year.
“Among well-informed economists in the government, establishing a property tax has been consensus for a long, long time,” says Gan Li, director of the CHFS and professor of economics at Texas A&M University. “The concern is politics. No one wants to be blamed for bursting the housing bubble.”
China’s home ownership rate is 87 per cent, according to the survey — creating a large and powerful constituency opposing a property tax. In the US, the rate is only 64 per cent, according to census data.
A survey by FT Confidential Research, an independent research service owned by the Financial Times, found that 28 per cent of families in medium-sized and large cities own a home that is vacant. Chinese investors have long favoured housing over the volatile stock market and low-yielding bond market, and capital controls limit households’ ability to buy foreign assets.
Contrary to popular perception, overall Chinese house prices are not particularly high relative to incomes when compared with other east Asian countries. But in a few large cities the affordability problem is acute. In addition to Shenzhen, Beijing, Shanghai, Nanjing and Hangzhou all have price-to-income ratios higher than that of New York.
“The dilemma is that in China, the property tax is probably most useful in the tier-1 cities, but also the strongest resistance is in these cities for exactly the same reason,” said Haibin Zhu, chief greater China economist at JPMorgan in Hong Kong.
Pilot tax schemes in Chongqing and Shanghai launched in 2011 were designed to limit the impact on poorer households.
Chongqing levied the taxonly on homes priced at more than double the city’s average home price, with rates ranging of 0.5-1.2 per cent depending on the dwelling’s value. In Shanghai, rates were 0.4 per cent and 0.6 per cent, while resident families were only subject to the tax on second homes above a certain size.
Still, there are some technical issues that make a property tax difficult to roll out, most importantly the lack of a nationwide property registry, which means local governments in many cities do not know who owns every home.
The dilemma is that in China, the property tax is probably most useful in the tier-1 cities, but also the strongest resistance is in these cities for exactly the same reason
Yilin Hou, a professor of public policy at Syracuse University who published a book last year detailing a property tax proposal for China, believes this challenge is surmountable.
“Identification of property owners is in fact less difficult than has been imagined,” he said. “If local governments are authorised to levy and collect the tax, and then use the revenue at their discretion on local public services, they will have full incentive to enforce the tax.”
Mr Hou sees at least some reason for optimism. He notes that a draft property tax law has already been through several revisions and that in China, policy deliberation is often hidden from public view.
“I like to stay on the optimistic side to assume that though this seems to have stalled on the surface, ground work has never stopped,” he said. “The Chinese style is, once something is announced, everything has been already done.”
But other experts take a dimmer view — including Gu Kang, former director of government-advising think-tank the China Academy of Fiscal Sciences and one of the country’s most influential experts on the property tax proposals.
“All sorts of internal debates are used as an excuse to delay the process. It’s a real display of rigidity of consolidated interests,” he told 21st Century Business Herald in an unusually candid interview this year. “Disturbing vested interests is truly more perilous than touching one’s own soul.”
Additional reporting by Ma Nan
Follow Gabriel Wildau on Twitter: @gabewildau