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.
I am sue a significant drop in prices will affect the businesses. Many took stimulus money and loans and invested in property instead of their core business. Recently the government forbids non property related companies to invest in property, but it is too late now. Many companies own more assets in property than in their core business.
Let us consider the new from another perspective: The tax will be used to fix the problems that the housing boom created. I know that Jim likes history and it is my understanding that some cities in the newly developed word have grown very rapidly. My question is: Have they run the same problems of London in the Victorian age? If yes how can we profit from it?
It is reasonable to expect. Many countries with galloping house prices (Russia is another example) are slow on implementing a real-estate tax. However, governments will take their share sooner or later. Will it affect the economy? I seriously doubt. Will it affect the stock market? I am not sure – the monies, which otherwise go into houses (traditional way of investing in China), will go into stock market.
Run26.2,
It does seem like we might expect China to start stepping on the accelerator as soon as the damage is done. It’s a wonder more Chinese don’t suffer from economic whiplash!
An interesting article that is on topic with China and the real estate market.
http://mpettis.com/2010/05/beijing%e2%80%99s-stop-and-go-measures/
“It is even tougher to contract domestic liquidity. As long as China maintains the currency regime it is hard to control the domestic money supply, and the one powerful tool Beijing does have – too powerful to be wielded smoothly – is the lending quota. The problem here of course, to repeat, is that Chinese growth is so heavily dependent on additional investment, which is itself heavily dependent on new lending, that Beijing can’t really force down loan growth without seeing GDP growth drop sharply.”
Jim,
I’m having a little trouble wrapping my head around what kind of impact this will have on China’s businesses? I’m not certain this will send China rocketing into a recession/depression, or will it? It seems like China’s export businesses are doing just fine, or am I mistaken?