China is closer than ever to taxing property owners, analysts say, nearly two decades after authorities began floating the idea.
What’s changed is that Chinese President Xi Jinping now has the political momentum to get the ball rolling on property tax, analysts said. This summer, Xi has emphasized authorities’ commitment to delivering “common prosperity,” or moderate wealth for all, rather than just a few.
And in an essay earlier this month detailing what common prosperity means, Xi called for regulating excessively high incomes, with measures such as tests of a property tax.
On Saturday, the top executive body, the State Council, was authorized to conduct such a test for five years in unspecified regions. These developments follow years of trying to limit speculation in China’s property market, which accounts for the bulk of household wealth.
“I think the central government has chosen [the] right time because of the political reshuffling happening before and after the 20th party congress next year, so to really resist a central government policy will be [a risk] to local government officials’ own career,” said Yue Su, principal economist at The Economist Intelligence Unit.
She was referring to the National Congress of the Chinese Communist Party, held every five years to determine top leadership positions.
Property tax talk since 2003
Unlike the U.S., China does not have a blanket tax on property. Real estate ownership in China can also differ. For example, state-owned enterprises have distributed apartments to their employees.
Chinese leaders began discussing a property tax in 2003, but so far only the municipalities of Shanghai and Chongqing have implemented a limited version, analysts said.
The experiences of those two cities in the last decade haven’t created a compelling argument for other local governments to roll out a property tax, Larry Hu, chief China economist at Macquarie, said in a note over the weekend.
In 2020, property taxes in Shanghai and Chongqing accounted for 5% or less of local tax revenue, and contributed far less than what land sales did, Hu said.
More than 20% of regional and local government revenue comes from sales of land to real estate developers, according to Moody’s. But if the property market is successfully tapped through tax channels, it could ultimately bring in significant revenue for local authorities.
Real estate and related sectors like construction account for at least 25% of China’s GDP, according to Moody’s.
Those figures partly reveal just what a force real estate is in China.
China’s privatization of the housing market in 1998 allowed an older generation to buy apartments at a low cost, giving them a disproportionately larger share of the property market than younger generations, Hu said in a note over the weekend. He added that home prices vary significantly by city.
“Property tax in China is much more than a wealth redistribution from rich to poor, but from older generations and high-tier [more developed] city residents to the rest,” Hu said. “As the result, the resistance to property tax is not only broad but also powerful.”
A tax on wealth
Property accounts for about 70% to 80% of household wealth in China, and drives about 10% of household income, Moody’s said.
A nationwide property tax would likely require disclosures of business and government leaders’ real estate holdings, which means such a policy could meet resistance even as the country has been cracking down on corruption.
But the latest political developments could tip the scale. Tycoons once built fortunes through developers like Evergrande by relying on debt for growth. That use of debt has become a target of government scrutiny in the last 18 months.
In addition, Xi said in August that pursuing “common prosperity” in China would require curbing “excessive” income and encouraging the wealthy to give back to society. Later that month, the State Taxation Administration said it was investigating individuals who concealed their high income and evaded taxes.
“The big idea is of course to recreate a lot of new, happy, middle class people who have affordable housing and affordable health care and affordable education, and therefore happy citizens,” David Roche, Independent Strategy, president and global strategist, said Monday on CNBC’s “Squawk Box Asia.”
“And in order to do this you need to make sure that housing is for living — that is, not speculation, or for investment,” Roche said. “So, [property tax] is not something which is going to be left to local authorities to put into practice or local governments. It is something which they will have to do because it is coming from the top, and therefore, it will happen.”
Even with the latest political momentum, analysts don’t expect a nationwide tax on real estate immediately.
“We believe Beijing is determined to quicken the rollout of property tax, but will still proceed in a cautious way and only phase in the tax gradually,” Ting Lu, chief China economist at Nomura, said in a note Monday.
“Still,” he said, “the expectation of ever-rising home prices will likely be significantly reined in among Chinese households, new home sales across China could slow down, Beijing might see mounting challenges on the road to a nationwide property tax, and near-term pains are inevitable.”
Ultimately, authorities will need to weigh the economic consequences of any moves on China’s massive real estate market.
If there are simultaneous property dumps, that might slow the introduction of property tax and increase the ability of individuals to apply for exemptions, the EIU’s Su said.