The year 2020 is a sad one, and when the new year begins, Chinese urban households may face a new tax they don’t want to be around, a property tax. This will concern thousands of households in China. From a macroeconomic perspective, the CCP will sooner or later impose a property tax; and the result of the property tax will be that local governments will have a new source of revenue, but the overall economy will spend less as a result, leading to a greater depression in the service and manufacturing sectors.
I. No tax on property appreciation
For the past 20 years, the Chinese have viewed housing as a rigid family need, not only for marriage, but also to show that personal success depends on housing. Many people see owning a set of housing or even several sets of housing as a sign that they are doing well in society; if they don’t own a set of property, they will feel very humiliated in front of their relatives and friends. Therefore, even if they are burdened with heavy mortgage, they still have to compete to buy a house.
At the beginning of 2019, Guangfa Bank and Southwest University of Finance and Economics did a property survey on tens of thousands of families in 23 cities in 7 regions of North, East, Central, South, Southwest, Northeast and Northwest China and published the 2018 China Urban Family Wealth health Report. This report disclosed that in 2018, the average Chinese urban household had total assets of 1.62 million yuan and net assets of 1.54 million yuan; housing accounted for 78% of total household assets, while financial assets accounted for only 12%. In the United States, the value of property accounts for only 35% of total household assets, while financial assets account for 43%. Perhaps some Chinese would say that the proportion of property in U.S. household assets is less than half that of Chinese households because U.S. property appreciation is slow; in China, it is common for property to increase in value by an average of 5% per year, buying stocks is risky, and property appreciation is just like people’s age, which only increases but not decreases.
In fact, American families are not so keen to hold multiple properties, related to property taxes. In the U.S., town governments in many states must levy property taxes, with property valuations and tax rates varying depending on the spending needs of local elementary and secondary schools, and American families in most states must pay real estate taxes (including land taxes on private land surrounding the home) when they hold property. Town governments must be approved by elected town councils to raise property tax rates, and residents are largely opposed to such increases; some town governments would rather develop public land into new residential areas to broaden the property tax base than risk public opinion by raising property tax rates.
Unlike Chinese families, the Chinese Communist Party first confiscated private property and confiscated it; after the Cultural Revolution, some private property was returned, but most people lived in public housing units built with public funds and then allocated. It was not until the 1990s, when the public housing system was reformed one after another and tenants were allowed to buy their own homes, that private ownership of housing became widespread. Since then, with the boom in the real estate industry, more and more families have purchased commercial homes. However, Chinese households do not need to pay property taxes. Many argue that the housing of Chinese urban families does not include publicly owned building land, and that homeowners only have the right to use their property for decades, so the government should not levy property taxes under property rights laws. In fact, the Chinese Communist Party has always been lenient in this regard, and the current Provisional Regulations on Property Tax, Article 5, Paragraph 4, provides that personally owned property for non-business purposes is exempt from property tax. Therefore, if the value of the property increases, the property tax is exempted, and the increase in value is like a stable increase in the family’s property, which makes the next generation of many urban families feel confident about the property they can inherit in the future.
Second, the property tax is approaching?
After all, the Chinese government is not elected by the people, and the people have almost no binding power on the government. The current provisional property tax regulations certainly exempt urban residents from property tax, but this provisional regulation will be replaced by a new property tax law at any time. Once the government needs to introduce property taxes for urban households, its need will become law and enforceable.
In fact, as early as 2017, the Communist Party of China included the property tax in its five-year legislative plan, but since then it has “only heard the stairs ringing, but not seen anyone coming down”, as if the property tax is fading away. This can be seen from the annual government work report of the Premier at the National People’s Congress. The government work reports of 2018 and 2019 expressed the process of real estate tax legislation with “steadily advancing” and “steadily advancing” respectively; while last year’s government work report The authorities did not mention real estate tax at all because the epidemic was rampant and it was not convenient for the authorities to raise real estate tax. However, the “Opinions on Accelerating the Improvement of Socialist Market Economy System in the New Era” released by the authorities on May 11 last year mentioned that the legislation on real estate tax should be promoted steadily.
On December 21, 2020, the Institute of Financial and Strategic Studies of the Chinese Academy of Social Sciences published a report on China’s housing development (2020-2021), which predicted that the increase in commodity housing prices might fall this year and suggested accelerating the introduction of a real estate tax. He mentioned the need to cultivate local tax sources and actively and steadily promote real estate tax legislation and reform in accordance with the principle of “legislation first, full authorization and step-by-step advancement”. The wording used by Liu Kun in the real estate tax legislation is more than the “steady and stable” used by the previous authorities, which means it is obvious that the property tax is getting closer and closer. The official release has immediately produced social repercussions, and recently the topic of property tax has been discussed again on the Internet, which has aroused the concern of many people.
Third, land finance may cut off the flow?
The real reason for the approaching property tax is the possibility of a break in the flow of land finance. During Zhu Rongji’s term of office, the reform of the tax separation system between central and local finance was implemented in 1994. Before the reform, a large amount of tax revenue flowed to local governments, and the central government could not make ends meet; after the reform, most of the tax revenue flowed to the central government, and local governments’ revenue was mainly maintained by limited local tax revenue, central financial allocation and land concessions. With a serious shortage of local tax revenue and central government grants, local governments have gradually developed a dependence on land finance over the past 20 years, i.e., relying on land sales to build houses to maintain local revenues. At the height of the epidemic in the first quarter of last year, local governments’ revenue from the sale of state-owned land use rights was 1.1 trillion yuan, down 8%; by the end of September, local governments kept increasing their land selling actions, and local governments’ revenue from the sale of state-owned land use rights in the first 3 quarters was 4.9 trillion yuan, up 10%. It looks like local governments will still be able to get by with their land finances in 2020.
However, land is sold to real estate companies, and money is turned into land revenue by bank loans from real estate companies and pre-sale deposits paid by home buyers, but how can real estate companies build and sell houses to recover their investment in a depressed real estate industry? Can these newly sold lands last year be developed, designed and built, and finally have to sell new houses at the end of the year to recoup their investment? From the national new home sales announced at the end of September last year, there is still some degree of growth by and large; that is, although the outlook for second-hand home prices is not optimistic, new homes can still be sold in some cities.
However, in the overall real estate supply exceeds demand, it will be difficult for real estate companies to buy as much land in the future as before; with the relative contraction of the scale of real estate companies buying land, it will be increasingly difficult for local governments to support their land finance. If the real estate is not sold, the local government can not sell land, land finance will be broken. But the local government still has to support officials, pay for education, as well as a variety of local expenses that can not be avoided, where the money comes from? Naturally, local governments have to prepare for a rainy day and open up new alternative sources of local finance before land finance revenue is completely cut off. If local governments do not start preparing now, it will be too late when local finance basically loses the source of land finance revenue.
Do local governments have other alternative sources of revenue besides the introduction of property tax? At present, the real estate industry is still active among all industries, while the service industry and manufacturing industry have been hit hard and a large number of enterprises have closed down, so it is impossible to expect a sudden surge of enterprises to bring abundant tax sources. The only alternative to land revenue is to play with the product of land finance – property. This is the reason why the property tax is about to be introduced.
Fourth, the property market has entered a bear market, saving local finance into the push of real estate tax
Many people believe that the reason why the property tax will not come out is because the real estate industry is already in a state of decline, in this case, if the property tax is introduced, even if only 1% is levied, it will accelerate the collapse of housing prices. This is a situation that the top management does not want to see. The top management wants a soft landing for the real estate industry, but of course does not want to see a hard landing for the real estate industry. This view more or less reflects the wishful thinking of urban property owners. In fact, if the real estate industry has entered a depression, for the authorities, it means the end of the local government’s land finance, the authorities are more concerned about the local government’s financial difficulties into the unresolved situation than the loss of interests of the owners. Therefore, it is precisely at the time when the plight of the real estate industry cannot be recovered that the real estate tax is coming.
The People’s Daily published an article by Minister of Housing and Construction Wang Meng Hui on Dec. 29 last year, saying that the excessive real estate approach to urban development and construction is unsustainable. According to the national house price trend, after 2019, the previous situation where house prices rose by more than 5% a year is gone, and the situation will further deteriorate in 2020. The “China Housing Development Report (2020-2021)” by the Institute of Financial and Strategic Studies of the Chinese Academy of Social Sciences shows that from October 2019 to October 2020, nine cities will see a decline in house prices of 5% or more, with a maximum decline of 9%; if compared with historical house price peaks, the downward trend of house prices in some cities is even more pronounced. According to the monitoring of the Latitude Housing Index, from the historical peak of house prices in each city to October last year, 20 cities saw house prices fall by more than 10% from the peak, with 9 of them falling by more than 15% from the peak in 2017.
By far the most conspicuous plunge in home prices in first-tier cities was in the Beijing-ring region. 2017 saw the introduction of a property market control policy in Beijing, followed by a significant drop in home prices, with the average home price in Beijing falling by 16%. Yanjiao area in the eastern part of Beijing’s main urban area, once a popular area sought after by real estate investors, was reported by Interface News on Oct. 6 last year as the leading Yanjiao area in the Beijing-ring property market dropped from 38,000 per square meter in 2017 to 18,000 in 2020, a drop of more than 52 percent, with the largest drop in Yongqing area falling from 23,000 to 6,500 yuan, a drop of 71 percent. Last July, the volume of transactions fell in several areas of the Beijing-ring residential market, including Yanjiao, which fell 62% from the previous year, and half of the real estate agency stores throughout Yanjiao have closed.
So, what are the housing price trends in other cities where the property market regulation and control policies are less strong than in Beijing? The China Housing Development Report (2020-2021) points out that cities with falling home prices are located in different areas from north to south, with Qingdao down 23%, Tianjin down 22%, Zhaoqing in Guangdong down 19%, Shijiazhuang, Haikou and Jinan down 18%, Xishuangbanna down 15%, Baoding down 14%, Beihai and Zhengzhou in Guangxi down 13%, and Zhongshan in Guangdong down 12 percent. There are also some third- and fourth-tier cities where prices have fallen significantly.
Since the property market has irretrievably entered a bear market, the authorities’ concern of postponing the property tax due to concerns about the property market has faded, and the urgency of saving local finances has become the driving force behind the property tax legislation.
V. Property tax will hit the economy
In fact, technical preparations for the property tax have long been underway across China, the main one being the national networking of property information across the country, so that multiple suites of homeowners in different places cannot be hidden. the unified real estate registration information management infrastructure platform was nationally networked in June 2018, and since then matters such as the networking of online registration records have continued to advance, the technical obstacles to the property tax will soon be removed.
The real estate tax hit the “speculators” the hardest, and the soaring prices in many cities were partly due to the “speculators” hoarding houses, resulting in long-term high prices. Although speculation has been curbed in the past two years, the number of vacant houses in the hands of speculators is still very large, and the property tax is obviously a panacea to force them to sell their houses at a lower price. The vast majority of urban households hold only one or a few suites, will they become the target of property tax?
There are several controversies surrounding the property tax burden, which is a common concern for urban households. First, whether land is taxed twice. The price of land and land use fees are already included in the land price when the government sells land, and the real estate company’s sale price includes the cost of land. Should only property tax be levied in the future, without secondarily taxing the land that residents do not own? Secondly, should the property tax be calculated using the purchase price as the taxable value or the average market price as the taxable value. The former uses the transaction price when the property is registered, while the latter involves the assessment of the market value of the property, and the private sector is certainly very dissatisfied with any valuation by the government. The former is naturally popular with homeowners, while the latter is favored by local governments. The difference lies in whether the government can share the profits from the gain in house price increase after the purchase. Third, on what criteria is the tax levied. It is currently popular to say that the property tax rate and the starting point of taxation will be determined by the local government, and the tax rate in the same big city may differ between urban and remote suburban areas. Fourth, in addition to commercial houses, whether a large number of housing reform houses, welfare houses, small property rights houses, affordable houses, etc. will also be taxed. Fifth, property tax needs to be levied directly on hundreds of millions of residents, and there is no tax in the operation of China’s current tax system that is levied directly on individuals by the taxation department, so the collection process is difficult.
The property tax involves the interests of most urban households, not only because the tax is introduced from scratch and adds to the financial burden of residents, but also because of the disputes between private citizens and local governments over the tax burden. In the past, since no property tax was paid, as long as housing prices were still affordable, buying a house was a good deal. Once the property tax is introduced, both those who are ready to buy a house and those who have already bought a house will need to add a perennial property tax expense to their household budget; not only those who own multiple suites are worried, but even those who have only one suite are also furious, wondering if the property tax in the city they live in will spare them. In addition to homeowners, people who rent their homes will also be greatly affected because landlords will add the property tax to the rent.
When and how the property tax will be introduced in the future will touch the hearts of countless people, which is closely related to their future living standards. From a macroeconomic perspective, the CCP will sooner or later impose a property tax; and the result of the property tax is that local governments will have a new source of revenue, but the overall economy will have less consumption as a result, leading to an even greater depression in the service and manufacturing industries.
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