[photopress:china_real_estate_boom.jpg,full,alignright]Xinhua reports that local governments greatly undermined the central government’s macro control policies in the real estate sector because they failed to fully implement government directives.
The central policies were aimed at curbing property prices; they range from encouraging the building of economically affordable housing to taxing capital gains on property sales. Yet, in many places, prices just kept on soaring.
A typical example is the distortion of the capital gains tax policy issued last July. The new policy stipulated that from last August, all gains on individual housing transactions are subject to a 20% individual income tax. Yet, according to some local rules, if a seller fails to document the property’s original price, the tax bureau would tax the transactions at 3% of the total revenue from the sale. The incentive is not to disclose the original cost.
Almost all the transactions were taxed on no more than 3% instead of 20%.
Partly this is explained by the fact that local governments’ performance is evaluated on local GDP, and real estate plays a big part. Gu Jianfa, professor at Research Center of City and Real Estate, Shanghai Academy of Social Sciences, said, ‘Since real estate industry usually plays a leading role in boosting the economy of an area, obviously there are few incentives for local governments to slow down the development of the real estate.’