China Introduces First Ever Property Taxes

In order to curb inflation and help bring down the cost of housing the Chinese government has instituted for the first time a property tax, which will go into effect this coming Friday, February 4th, 2011.

Curb Inflation

The tax will first be introduced into the key cities of Shanghai and Chongqing, and will only apply to the purchase of second homes. The reform comes in the wake of the recent startling growth of the Chinese economy, which posted an increase in GDP of 10.3% in 2010, its most robust growth since the beginning of the international financial crisis in 2008. The well-founded fear that along with such significant economic growth also comes inflation has stimulated Beijing to take this extraordinary step of instituting a property tax.

Overall prices have been rising, and the inflation rate for December, 2010 was close to 4.6%, a much higher figure than what the government was hoping to see. Since the cost of housing is one of the main driving forces of inflation, the government decided to take measures to help keep the cost of homes down.

Reduce Speculation

The hope is that the new property tax, which will be paid on a yearly basis and will cost between 0.4% and 1.2% of the purchase price, depending on how the home cost compares with market value, will reduce speculation on real estate.

The head of research at the China Real Estate Index System in Beijing, Ge Haifeng, explained that the property tax will have “a big psychological effect on potential home buyers. China’s housing market may get really quiet in coming months.”

The property tax in Shanghai will be between 0.4% and 0.6% on the purchase of second homes only. In Chongqing in southwest China the tax will have a wider range, from 0.5% to the maximum of 1.2%.

Mayor Hopeful

The mayor of Chongqing, Huang Qifan, is hopeful that the tax will have a positive effect on inflation and housing prices. He said however that the effects of the new tax might not be immediately felt, as he explained, “It is impossible for housing prices to fall overnight because of the property tax,” but, “it will help to curb speculation in the housing market.”

Some Dissension

Not everyone agrees that the institution of a property tax law is a positive move. A spokesman for the property development firm of Shui On Group stated that there is no “property bubble” now in China, and complained that the government restrictions on bank loans were causing financing to be more complex and difficult for the property development industry.

According to Michael Klibaner, the head of China research for Jones Lang LaSalle Property Company, the primary goal of the new tax is to prevent the amassing of properties, and not to control of prices.

“Previously there was very little holding cost for residential property because many people paid 100% cash for these properties. Now the holding cost is no longer zero,” Mr Klibaner said.

“When the holding cost is zero, it’s very easy to let these homes sit idle. It doesn’t cost you anything to let them sit there. Now there’s a holding cost – the hope is it will change the way people perceive real estate as an asset class.”