How China Is Rolling Out a Property Tax on Homes, and Why

(Bloomberg) -- The history of private home ownership in Communist China is short, only a couple decades or so. But prices have skyrocketed so quickly that it now has some of the world’s most expensive housing markets. That’s widening the country’s wealth gap and leaving many people, particularly the young and poor, out in the cold. Now, amid a broad effort by President Xi Jinping to promote “common prosperity,” authorities are inching ahead with long-debated plans to start taxing some residential property owners, partly to deter speculation and partly to address social inequality. Such a reform could have far-reaching implications for the country’s 300 million-strong middle class.

1. How does the system work now?

There’s an annual tax on commercial property but not most residential assets. Instead, local governments earn much of their revenue from land sales -- 8.4 trillion yuan ($1.3 trillion) last year, compared to 10.1 trillion yuan from other sources including sales taxes and personal and corporate income taxes. So they resist any measures that could suppress real estate values.

2. What’s been tried?

Since 2011, the municipal governments in Shanghai and Chongqing have been conducting limited property tax trials. In Shanghai, only some residences purchased after 2011 are covered. In Chongqing, only high-end properties and villas are taxed. The tax rate in Shanghai is 0.4% to 0.6% of the last-sale price, and slightly higher in Chongqing at 0.5% to 1.2%. (In the U.S., such levies can reach as high as 2.13% in states such as New Jersey.) 

3. How’s that going?

The taxes have had little impact. The Shanghai and Chongqing levies contributed less than 5% of tax income in 2020 -- and failed to stem rising home prices. Shanghai’s property tax revenue amounted to 19.9 billion yuan last year, according to the city’s tax authority. That’s only about 7% of its income from land sales, according to Bloomberg calculations based on official data.

4. What’s the new plan?

China’s top legislative body in October authorized the expansion of the trials to more areas, but details weren’t provided. It said the plan would run for five years and was designed to “guide rational buying.” Some analysts expect the new trials to be closer to how things work in developed markets: 

• All existing residences are highly likely to be included this time to widen the tax base, Li Qilin, chief economist at Hongta Securities Co., said in a report. Local governments may exempt 30 to 60 square meters (320 to 650 square feet) for each household member, based on the area’s per capita living space.
• First homes likely won’t be exempt from the levy, but the tax rate will probably start off low to ensure it’s affordable, Liu Jianwen, head of the China Association for Fiscal and Tax Law, said in an interview. Local governments will likely decide on details, but the tax will probably be based on appraised value, Liu said, in line with comments from Finance Minister Liu Kun in May.
• The tax rate may range between 0.2% and 1% in different areas, Citic Securities said in a report.

Part of the difficulty is the need to know who owns what and what the value is -- a potential threat to any party elites with something to hide. China has been trying to create a national, online property registry since 2015.

5. What’s behind this?

Property assets are increasingly viewed as a factor widening China’s wealth gap, something that Xi has increasingly focused on as he prepares to claim an unprecedented third term in 2022. In a speech in August Xi emphasized promoting common prosperity and social harmony by growing the middle class and reducing the extremes of rich and poor. He urged pursuing property taxes “actively and prudently” as one approach. More broadly, the government is on a campaign to ease financial pressures on the middle class, from restricting expensive after-school tutoring to ordering higher wages for gig-economy workers. Bringing down house prices with a new tax would fit that agenda. But taxes are as politically fraught in China as they are anywhere, and the Communist Party is sensitive to public opinion, particularly among the middle class. Hence the go slow approach. 

6. How expensive is housing? 

The biggest cities such as Shenzhen and Beijing are only a notch or two better than Hong Kong, which is often named the world’s most expensive market. The average cost of buying an apartment in Shenzhen was 43.5 times the average annual salary for local residents last year, and the ratio has worsened this year across China as prices continued to rise, according to studies by E-house China Research and Development Institute. Unit prices in four so-called first-tier cities have tripled over the past decade, to around 55,500 yuan per square meter from around 18,000 yuan in 2009, data from China Real Estate Information show.

7. What cities could join the trial? 

Speculation has centered on Shenzhen, China’s tech hub, and the southern province of Hainan, both of which have been designated by Xi as special economic zones. Hangzhou and Ningbo in the wealthy province of Zhejiang, where a pilot program tied to Xi’s common prosperity vision began in June, are also mentioned as possibilities, along with Nanjing, Suzhou and Beijing.

8. What kind of impact will it have?

Little in the short term, but possibly a lot further out. A property tax could hurt lower-income buyers, which wouldn’t do much to narrow the wealth gap. But it also may spur some wealthy landlords to sell some hoarded properties that often sit empty as investments. Such a tax may help local governments break their reliance on selling land to developers. But even it were implemented nationally, property tax revenue may only reach a fifth of the $1 trillion land sales bring in annually, according to ANZ Corp. economist Betty Wang. Nevertheless, the trial sends a strong message that China is determined to break the mentality that housing is a “one-way bet,” which drives the market higher. Jia Kang, the former head of a finance ministry research institute and long-time property tax advocate, wrote on social media about what he called the “yawning gap” in homeownership, with some people hoarding hundreds of units and others unable to buy a basic home. The property tax trials will provide feedback, like “gnawing at a hard bone,” he wrote, for eventual legislation on a wider or even national scale. 

The Reference Shelf

• QuickTakes on the ‘China model’ of governance, the clampdown on tutoring and the technology sector, and the push for more babies.
• Bloomberg News’s Tom Hancock and Bloomberg Economics’s Tom Orlik describe the new order in China as progressive authoritarianism, while Bloomberg Opinion’s Matthew Brooker calls it a market detour to Marxism.
• Cash-strapped developers have become more reluctant to bid for land amid a nationwide property slump linked to the crisis at China Evergrande Group.
• Bloomberg Opinion’s Adam Minter says cheaper weddings may be next.

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With assistance from Bloomberg