Don't Bet Your House on China's Property Tax Just Yet

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(Bloomberg Gadfly) -- Ignore the noise. China's long-delayed property tax is probably still at least three years away, despite a flurry of recent announcements.

The concept of a levy on homeowners collected by local authorities is certainly gaining currency. Premier Li Keqiang said China "will steadily push forward legislation" in his annual report to the National People's Congress on Monday. The tax may be based on appraisal value, Vice Finance Minister Shi Yaobin said on Wednesday. Former Finance Minister Lou Jiwei said a draft bill may be reviewed by the legislature this year.

Taxing homeowners has the potential to tame housing prices and provide a more stable and reliable income stream for local governments, helping to control debt, fund social programs and alleviate a wealth gap that's been exacerbated by the nation's 13-year property boom. The current system, in which local authorities raise revenue by selling land to developers, can't go on forever: It's unpredictable, and creates a systemic incentive to push real estate prices ever higher.

Regular levies on property ownership are already common throughout the capitalist world, and look like an inevitable funding route one day for China's local governments, whose debt woes are no secret. That doesn't mean a tax will be easy to implement.

Chinese households have most of their wealth tied up in real estate, with some estimates putting the country's residential stock at $44 trillion, according to the South China Morning Post. Taxing that is sure to prove contentious.

Those who have benefited most from the existing system, acquiring multiple properties, stand to be hurt the most and can be expected to push back the hardest. What's the betting that local government officials themselves may be among those with a vested interest in preserving the existing system?

There's also a plethora of technical questions, such as whether to base the tax on market value or original purchase price, both of which present their own problems. Many people live in homes bought from state-owned employers for small amounts; revaluing those properties at current market values will be painful.

Shanghai and Chongqing already have some property taxes, but targeted at only a segment of the market. Shanghai's applies only to second-home purchases, while Chongqing taxes only the most expensive homes.

Still, the real reason a property tax will remain just talk for now is that Beijing is dealing with too many more pressing issues. The central government is fighting what its own leaders have called three years of "critical battles." These involve punishing targets for curbing pollution, tackling poverty and bringing down financial risk -- while keeping GDP growth at 6.5 percent.

China's real estate market is already slowing. A property tax that further cools the industry -- a critical component of the economy -- would make those challenges harder to achieve. This is also a sensitive time to be tinkering with town and city finances, with Beijing having already restricted borrowing by local-government financing vehicles, a key funding conduit.

That takes us to 2021, at the earliest. Investors certainly don't appear overly concerned: Property stocks are the best performers on the Shanghai Composite Index this week, rising more than 2 percent.

Former Finance Minister Lou said on Tuesday that there may be a second or even a third review of the tax if the draft draws many suggestions. Expect that bill to be stuck in committee for some time to come.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

©2018 Bloomberg L.P.

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