A VALUE-BASED tax on property holdings should help bring stability to the housing market, but not unless the central government offers clarity and local governments offer compliance.
China's property price growth may have eased nationwide in recent months, but sustained liquidity and strong land sales do not suggest the market is about to go into decline.
And a property tax - once heralded as a "nuclear weapon" that would bring reform to the real estate market but now subject to an intra-government tug-of-war - is unlikely to spoil the speculators' party.
Pilot projects
While homeowners in most countries pay annual tax based on the value of their property holdings, Chinese are only liable for stamp duties and transaction taxes when buying or selling real estate. The State Council wants to remedy this by introducing a property tax.
It has been reported that Shanghai and Chongqing have already submitted proposals for pilot projects and both are expected to launch in the first quarter of this year.
The Chongqing authorities want to mainly target high-end apartments and villas while Shanghai plans to levy a tax on new homes only, based on average per capita living space.
According to media reports, Chongqing is expected to tax all villas as well as apartments with a floor area of more than 144 square meters and priced at 2 to 2.5 times the average price.
The tax will target owners who have more than one flat and have a total floor area of more than 200 square meters. Under such cases, the tax rate may be 0.5 to 1.5 percent.
Shanghai is likely to tax only new homes. Some analysts speculated that the city would tax families who have a floor area of more than 200 square meters or 70 square meters per person. The tax rate is likely to be about 0.5 percent.
China initiated rules on real estate taxes as early as October 1986 but exempted non-commercial properties. The Shanghai and Chongqing proposals are in effect versions of their current tax systems modified to include residential properties.
One of the major objectives of the property tax is to help break the volatile price cycles in the market. Imposing a tax on property holdings, rather than just at the transaction stage, would make investors more cost conscious. Speculators tend to buy property with a view to capital appreciation, not rental income. But if they pay an annual tax - which rises as the property value rises - it makes no sense to leave the apartment standing empty; so they are likely to be more careful about when and where they buy.
Developers, facing penalties if they allow land to stand idle, would in turn become more conservative with land purchases, aware that there needs to be a closer match between demand and supply. The days of sky-high bids at land auctions would end and end-users may end up benefiting from lower retail prices.
Money spinners
Local governments, reliant on premiums from land sales for a large chunk of their fiscal revenues, would receive the proceeds of the property tax instead - swapping a revenue stream that varies according to market conditions for one that offers consistent returns.
The problem is that local authorities don't completely buy into this theory and are wary of anything that threatens land auctions, which are established money spinners. Shanghai and Beijing generated record takings of US$23 billion and US$24 billion-plus, respectively, from auctions in 2010. These concerns might explain why Chongqing and Shanghai's proposals only target a tiny portion of home purchasers, most of whom are not sensitive to taxation.