Tax Reform May Be China’s Next Step in Reviving Real Estate Market

In recent months China’s government has quickly launched a variety of measures aimed at slowing the slide in its residential real estate market, and the rollback of a five percent tax on second-hand housing sales may be the next step in these policy adjustments.

According to a report today in the official China Securities Journal, government agencies have been instructed to gather opinions on the removal of the sales tax, which was put in place in early 2011, to discourage speculators from “flipping” houses as home prices rose rapidly.

The proposed removal of the tax on second-hand housing transactions comes after moves to remove restrictions on ownership of multiples homes and measures to encourage mortgage lending have so far failed to halt a steady slide in housing prices in China.

Shortening the Holding Period of Housing to Two Years

The tax currently under discussion requires property owners who sell their homes within five years of purchasing them to pay a five percent tax on the transaction. The levy was put in place at roughly the same time that the central government pushed out policies limiting the number of new home purchases per household and raising bank interest rates and reserve ratios.

While no firm decision has been made on the future of the measure, the government is now indicating that if its current survey shows the tax is no longer needed, then it could be “adjusted” in the future. The Securities Journal report indicates that the government is likely to shorten the minimum time required to own a house before it can be sold without paying the duty to two years from the current five.

China Struggles to Rekindle Housing Demand

The change in tax policy comes as China struggles with its most prolonged period of sliding housing prices since 2008 and potential homebuyers continue to sit on the sidelines in the hopes that rates may fall still further.

A survey released in September by the country’s National Bureau of Statistics found that the average price of new housing slid for the fourth consecutive month in August, and the bureau estimates that the cost of new homes has declined by 11 percent so far this year.

The slowdown in the real estate market, which is estimated to account for as much as 20 percent of China’s GDP, has helped bring down the country’s overall growth rate from 7.5 percent last year to where it may struggle to reach a 7.3 percent increase in GDP for 2014.

Launching a Barrage of Limited Measures

The government initially countered this decline in the housing market by letting local governments adjust or even roll back controls on housing starting in April of this year. Since then the authorities have restored support for mortgage discounts and tried to encourage banks to lend.

In July the government even brought back mortgage-backed securities, which had earlier been banned after the US subprime crisis, to try to make more credit available for home purchases.

This barrage of limited measures comes as Beijing attempts to steer away from a broad-based stimulus, such as it used to revive its economy in 2009, but which has been blamed for causing inflation in real estate prices and a nationwide asset bubble.