China is "on a treadmill to hell" due to its reliance on real estate to support economic growth, according to hedge fund manager Jim Chanos. Despite the very dubious logical nature of his analogy, China’s property market does seem to be heading toward infernal temperatures.
Rumors abound about the government introducing a nationwide property tax as a means of reining in the market. So far, Shanghai has confirmed that a tax of between 1.2% and 1.5%, based on 70% of a property’s purchase price, is under consideration. Beijing, Chongqing and Shenzhen are working on draft proposals for the State Council to review.
The levying of a property tax is a long-term solution to managing a maturing property market: By offering local governments a steady stream of tax income, it is an important step away from their dependence on land sales for revenue – a major systemic flaw. But as essential as property taxes are in the long term, they are not an immediate measure to cool current price growth.
The absence of concrete details suggests that the central government is in no position to roll out measures in the near term. Even if it were, the implementation of a property tax requires clear valuation procedures, as well as enormous administrative infrastructure – even if it is only on a city-by-city, rather than national, basis. Neither one exists.
There is no question that rising property prices – up 11.7% in March – are a concern; there are the makings of a political nightmare as east-coast white-collar workers begin to find themselves priced out of the market. Since the fourth quarter, Beijing has been dismantling the extremely loose monetary policy structure it created to support industries, including property, during the downturn. Austerity measures have also been introduced on the buyer side, including a reintroduction of a 5.5% tax on selling a home five years after its initial purchase.
The State Council recently ordered a down payment hike for mortgages on a second home to 50% from 40% at no lower than 1.1 times the base interest rate, and told banks they could refuse mortgages on third properties. It also said the down payment on a home bigger than 90 square meters must be no less than 30%.
These measures are important. Increasing mortgage rates and down payment sizes are proven means of slowing property markets, especially when targeting multiple-home owners – the speculators who are pulling prices away from would-be end users. Addressing the current price problem requires Beijing to confront those speculators head-on; a tax can wait.