Nova workboard

a blog from young economists at Nova SBE

China and a national property tax

According to CNBC China has start its preparation concerning a national property tax in order to rebalance the real estate sector. The main reasons for this are the low property prices and the overdevelopment of real estate in China.

China’s investors today are highly investing in the property markets so as to keep the economy growing. New apartments are build, as well as offices, shopping malls, etc. All this leads to an oversupply in the property markets and to the well known phenomenon of ‘ghost cities’. As a consequence of this soaring supply, prices for properties have become very low. According to Professor Gan of the Southwestern University of Finance and Economics in Chengdu and Texas University A&M, the current housing stock is from that size, that every household in China owns at least one house. Up to now, there are no holding costs in China to be in possession of a property. This implies that house owners will not have to pay a fine if their houses are not used, so they do not care whether their houses or buildings are utilized or not. That is one of the reasons why the ghost cities are able to exist, besides the fact that investors who buy the properties have enough money, so they do not feel it in their pockets when the apartments or buildings are empty and not being sold. Introducing a property tax may immediately have an effect on this situation of overbuilding.

The Chinese government already started to implement local pilot programs with the aim of slightly introducing the property tax. However, the programs failed because of opposition from the local authorities. Both at the local and provincial level the property tax is not a popular concept. One of the reasons for this disapproval is that several inhabitants and officials do not want to make public the exact amount of properties they own. Evidently, in order to implement a national property tax, the exact number of properties needs to be summed up in a national database. In contrast to the new property tax payers, the industry sector has no problem with the realization of such a tax, since they do not expect the taxes to hurt their businesses.

A national property tax will become a necessity in China to finance the local governments. Until now, Chinese governments are selling land use right, which form a large part of their revenues. Eventually, they will have no land anymore to sell, which implies that their revenues will dramatically shrink. This will lead to long term problems in terms of even higher local government debts.

Despite all the resistance, the market has already resigned that the tax is not preventable. The size of the tax is not yet discussed, but people expect it to be quite gradual.

 

Birgit Derzelle

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Author: studentnovasbe

Master student in Nova Sbe

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