(The author is a Reuters Breakingviews columnist. The
opinions expressed are his own)
By John Foley
BEIJING, March 4 (Reuters Breakingviews) - China’s house
prices are too high and local tax revenue too low. What better
way to address both problems than taxing capital gains on
property? China’s cabinet has promised to enforce such a levy on
homeowners. While that drove down the share prices of property
developers, it is unlikely to do the same for real estate
For local governments, a 20 percent real estate gains tax –
which already exists but is easily sidestepped – will be
welcome. They used to make as much as 40 percent of their total
income from selling land, but government curbs on property sales
last year squashed total land sales by 16.7 percent. A chunky
tax could pad out stretched budgets.
When it comes to pushing down prices, however, the case is
less compelling. True, the problem is serious. Credit Suisse
calculated last summer that while disposable income grew around
eight-fold between 2007 and 2011 in Beijing and Shanghai, house
prices jumped by a multiple of around 23. In second-tier cities
the ratio is lower, but still worrying.
The tax may not do much to address that. In a more developed
economy, a typical investor might divert cash into stocks or the
bank rather than face a 20 percent tax on property gains. Yet in
China’s stunted markets, neither is very attractive. Even a
dampened return on real estate beats the unpredictable returns
from equities. Regulated deposit rates barely beat inflation.
As for existing homeowners, a levy on capital gains risks
making them even less likely to sell when prices are going up. A
less liquid market is the last thing China needs. The problem
isn’t that buyers are flipping houses, but that they sit on
vacant properties, driving up demand for what's left.
The key isn’t tax, but reining in money growth. Real estate
prices rose for the ninth straight month in February, after a
record 2.5 trillion yuan of lending gushed through the economy.
A gains tax may stress out developers who rely on transaction
volumes to drive revenue. But only curbing monetary excess – and
giving Chinese savers more attractive places to store their cash
– will bring house prices back to earth.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- China’s cabinet announced a plan to strictly levy a 20
percent income tax on property gains, as part of a raft of
measures designed to curb property speculation. The measures
were published on March 1. The State Council also said it would
increase supply of housing and land, and push for the
construction of 6.3 million affordable housing units.
- Shares in listed developers fell sharply on March 4. At
midday China time, China Vanke and Poly Real Estate had both
fallen by the maximum allowable 10 percent. China Resources
Land, listed in Hong Kong, fell by 8.9 percent. The Shanghai
property sub-index fell by 9 percent.
- House prices in China’s 100 biggest cities rose for the
ninth month in February, according to the China Real Estate
System, a consultancy affiliated with property company Soufun.
Prices in February were 2.5 percent higher than a year earlier,
doubling January’s increase of 1.2 percent.
- Reuters: Hong Kong, China shares plummet as property curbs
hit developers [ID:nL4N0BW1NF]
- Reuters: China home prices rise for 9th month in Feb -
- Official announcement (Chinese): here
- For previous columns by the author, Reuters customers can
click on [FOLEY/]
(Editing by Peter Thal Larsen and Katrina Hamlin)
Keywords: BREAKINGVIEWS CHINA PROPERTY
(C) Reuters 2012. All rights reserved. Republication or redistribution of
Reuters content, including by caching, framing, or similar means, is
expressly prohibited without the prior written consent of Reuters. Reuters
and the Reuters sphere logo are registered trademarks and trademarks of
the Reuters group of companies around the world.