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China is starting to consider the unthinkable: a local property tax.

Shanghai’s city government is talking about instituting the country’s first tax on real estate. The Xiaoxiang Morning Herald, based in Hunan province, today reports that the city is considering a 1.5% tax, according to an unnamed real estate developer.

I think that’s unlikely. Beijing recently became the first Chinese city to limit residents to the purchase of just one new house. That policy, which goes into effect this month, was radical enough and caused developers and speculators in Beijing to sell some of their holdings.

 A city imposing its own taxes on real estate is just too big a jump for even Shanghai to take all at once.

I wouldn’t be surprised, though, to see some kind of announcement that endorses the idea of a tax but puts off implementation for a year or two.

We’ll know if I’m wrong soon enough.

According to a number of news sources the city government is scheduled to make an announcement on changes in policy on May 15. China Daily says the schedule is more extended with new rules likely within two weeks of tomorrow’s meeting of Shanghai’s housing bureau.

Just the hint of a tax—and other newspapers such as the Oriental Morning Post say the rate is more likely to be 0.8% rather than 1.5%–is enough to send some developers in Shanghai running for the door. An actual tax could well send prices tumbling. Real estate prices are already under pressure from government efforts to restrict lending and from limits on second and third mortgages.

A tax of 1.5% would be enough to produce as much as a 40% decline in prices, Wu Jianxiong an analyst at Central China Securities, told Bloomberg News.

That number is worryingly similar to estimates (also of 40%) of how big a hit to real estate prices China’s big banks could take without dangerous stress.

That may seem like a huge drop to project for real estate prices from just a small tax but in China’s overheated real estate market everybody is so leveraged that even a small shift has huge effects. In Beijing sales of apartments and houses as measured by floor area dropped 41% in April from April 2009. Is that all from Beijing’s new limit of one home purchase per family? Almost certainly not. The government is also tightening the supply of mortgage money. But it does show you exactly how volatile this real estate market is.