A nationwide property tax has long been a hard sell in China. It may be even tougher now that the crackdown on property leverage is threatening to drag the economy into a steep slump.
Even President
Xi Jinping,
the most powerful Chinese leader in decades, may not have the clout to implement it—at least not soon. After pushback within the ruling Communist Party, a proposal to test run the tax has been cut to around 10 cities, from an initial plan of about 30. The debate over whether China needs property taxes has been going on for more than a decade.
China’s housing market is already in the doldrums after Beijing tightened the screws on property lending, leading to the well publicized troubles of mammoth developer Evergrande. New-home prices for 70 major Chinese cities fell 0.08% in September from the previous month, according to official data released on Wednesday. The decline is small, but it is the first drop since 2015, when the housing market was in a deep slump. Home sales by value fell 16.9% year over year in September.
The difficulty rolling out a nationwide property tax highlights again the policy dilemma represented by real estate, which plays a key role in China’s political economy. In theory a property tax would provide a steady source of revenue, weaning local governments off reliance on volatile land sales, which account for around a third of their revenue.
But a tax high enough to do that will likely also crash the market. Shanghai and Chongqing have been doing fine since they rolled out a pilot program a decade ago. But the rate is low and there are many exemptions. The revenue from the tax was 1.2% of Shanghai’s total taxation in 2020, for example.
Many owners of investment properties in China are happy to keep their houses empty as long as prices keep going up. But they could decide to sell if a property tax means higher costs to keep properties vacant. That may achieve Mr. Xi’s slogan of “Housing is for living, not for speculation,” but it also risks significant damage to the broader market, the economy and banks if it happens over a short period. Recent estimates put vacancy rates between 13% and 22%, according to Oxford Economics, far higher than in many other advanced economies like Singapore, Germany and the U.K. Real estate, including indirect industries like steel, contributes to around a quarter of China’s gross domestic product. It is also the biggest asset of Chinese households, which have taken on much more debt in the past five years.
China needs to pivot away from its reliance on real estate, but as with the ever-expanding regulatory campaigns in other areas, trying to do everything at once risks killing the patient.
Write to Jacky Wong at jacky.wong@wsj.com
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