China embraces an old Western tradition ... property taxes

Looking to rein in China's skyrocketing home prices, the government began a pilot program that imposes property taxes on high-end properties.

A man walks past buildings under construction at a residential complex in Chongqing municipality, January 28, 2011. The cities of Shanghai and Chongqing led China in introducing its first-ever property tax for home buyers this week, revving up the government's battle to curb record home prices and tame inflation.

China’s first-ever property taxes, introduced this week, are unlikely to curb skyrocketing home prices, industry experts here warn, as pent-up demand from young middle class couples continues to boom.

Two of China’s fastest-growing cities, Shanghai and the western megalopolis of Chongqing, announced Thursday they would impose taxes on high-end properties, in pilot schemes that other Chinese cities are expected to follow.

The long-awaited moves came one day after Beijing raised the minimum down payment for second-home buyers to 60 percent of the purchase price, up from 50 percent, in another effort to rein in property prices.

The government is anxious to cool China’s red-hot property market, fearing a bubble that could wreak havoc with the economy if it burst, and worrying about antagonizing young first-time buyers, many of whom are being priced out of the market.

House prices in Beijing have risen 250 percent over the past four years, according to a report by the independent Livable City Research Institute in Hangzhou.

The new trial taxes, however, will have “a relatively minimal impact on prices,” says Michael Klibaner, head of China research at Jones Lang LaSalle, a leading real estate company. “The vast majority of buyers are owner-occupiers” of moderately priced apartments that will not be subject to taxes, he points out.

Shanghai will levy an annual 0.6 percent tax on second homes, while Chongqing will charge between 0.5 percent and 1.2 percent on all residential property, depending on its value.

Those rates are too low to deter speculative buyers of multiple homes, warns Ren Xianfang, a property analyst at HIS Global Insight, a macro-economic consulting firm in Beijing. “If they care they will pass those higher costs on to tenants,” she predicts, “or they are leaving the properties empty which means they don’t care whatever the tax.”

With Shanghai’s stock market falling, and bank interest rates lower than inflation, Ms. Ren says there are no alternatives to property for investors seeking a profit. “The market fundamentals have not changed,” she argues. “Demand and supply are imbalanced.”

The new taxes do, however, point to a major shift in the way Chinese cities will raise tax revenue in the future, suggests Mr. Klibaner. Currently they make a large share of their income by selling land to developers, but “there is a finite amount of land use rights that can be sold,” he says. “China needs to move to a more regular form of revenue generation” such as annual property taxes.

It will be a long time before China has the rules, regulations, land registries, and other infrastructure needed to impose US-style taxes based on assessed property values, Klibaner says, “but this is the first step in the process.”

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