Sunday, January 30, 2011

China Unveils Trial Property Tax in Two Cities

Since I was traveling in Germany last week, I missed a key development in the Chinese housing market. Two cities, Chongqing and Shanghai, introduced property taxes to help curb speculation and rising home prices ("China Unveils Long-Awaited Property Tax"). Although mild by most developed country standards, the introduction of the tax, coupled with an increase in minimum downpayment requirements for second homes from 50% to 60%, sends a strong signal that Chinese officials are serious about containing speculation in the market.

In Chongqing, the city levied a real-estate tax on villas owned by individuals — usually luxury, stand-alone homes — and on newly purchased high-end homes at three rates: 0.5%, 1%, and 1.2%, depending on market transaction prices. Separately, the Shanghai government said it would levy a temporary 0.6% real-estate tax on homes and may cut the rate to 0.4% for properties whose transaction prices are below certain—unspecified—levels. Both taxes were positioned as "trials" and could be modified depending on how they impact their respective housing markets.

As noted in prior posts, I believe one of the biggest factors driving the speculation in China's housing market is the minimal carrying costs of holding real estate. With bank lending rates below the rate of inflation and a general aversion to investing in the stock market, real estate has historically served as a store of wealth for many Chinese.

Admittedly, past efforts to contain house prices have had minimal effect and some may believe (rightly) that the announced property taxes are too small to have any great impact on the market. However, its always difficult to identify the straw that breaks the camel's back and last week's announcement convinces me even more that Chinese officials will continue to take incremental actions until home prices (particularly at the high end) begin to respond.

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