China’s Property Tax Could Lower Interest Rates, Economist Says

(Bloomberg) -- China’s property tax, when introduced more broadly, will lead to a long-term decline in interest rates as construction of new homes likely peak and provide less support to credit creation, according to Hongta Securities Co. Ltd.

The real estate sector has been the single most-important driver of credit creation in the past because local governments have used land as a key source of collateral to borrow money and fund infrastructure, which in turn drove up home and land prices, Li Qilin, chief economist at the Chinese brokerage said in a report Sunday. 

This has made property a pillar of the economy as it fueled the rapid urbanization over the past decades, while at the same time creating debt pressure in some regions. 

A property tax would reduce the incentive to hold multiple homes, which means there will be less demand for new houses since supply is already growing rapidly, Li said.

“The cycle of new building and home construction will peak with the launch of a property tax, which means that China’s interest rate level will lower systemically in the future,” said Li. The focus of future urbanization will be on renewing old districts and buildings instead of constructing new spaces, he said.

China announced Saturday it will expand property-tax reform trials to more areas and start taxing residential property owners in those locations in the next five years. It didn’t provide details of where it would implement those changes.

Li said the introduction of a property tax is necessary as China is charting a new growth model less dependent on debt. Many cities face a declining population and limited space for new construction, while skyrocketing home prices have also led to worsening wealth inequality and pessimism among young people, he said.  

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With assistance from Bloomberg