China Property Tax Panic Leads to Sliding Real Estate Stocks

An announcement this week that the Chinese government is “actively studying” an expansion of real estate taxes to more cities in China was rapidly followed by China’s stock market falling to its lowest point in seven weeks.

China Vanke Co. (000002) and Poly Real Estate Group Co. led the way down for real estate developers after China’s housing minister was quoted about the real estate tax plans and saying that the government is keeping an eye out for surging property transaction volumes and home prices.

According to Bloomberg,

“A gauge of property developers in the Shanghai index slid 2.1 percent, the most since Sept. 20. The measure is still up 12 percent this year, the only one of five industry groups to advance. Vanke, the biggest listed developer, fell 2.2 percent to 8.37 yuan. Poly Real Estate, the second largest, lost 1.4 percent to 11.46 yuan. China Merchants Property Development Co., the third biggest, sank 2.3 percent to 22.05 yuan.”

Given that the Xinhua report gave no details of the upcoming property tax, and such an expansion of the tax has been mentioned before, it appears that investors may have been hoping for a relaxed view toward the real estate market from China’s new leadership, only to have their hopes dashed right out of the gate.

As for the real estate tax itself, in the forms in which it has already been rolled out in Shanghai and Chongqing, its impact is not significant compared to the impact of the other policy restrictions such as the limits on ownership per household.

However, it appears that there are substantial fears from local governments, and the bankers, real estate developers and investors who have been part of the same real estate development food chain, that the current experimental tax may be ratcheted up to the point where it has a clear impact on the market.

In a study earlier this year on the prospects for China’s property tax published by the Lincoln Institute of Land Policy, the author, Joyce Yanyun Man pointed out a number of reasons why local governments and real estate investors fear a property tax.

“Many local governments believe that the adoption of such a tax will lower housing values and consequently lower the demand for land, thereby substantially reducing the land leasing fees obtained from the leasehold of state-owned land.”

In fact, while local governments are currently stymied by policy restrictions on housing sales, they have good reason to hope that the central government eventually just gives up on them, rather than replaces those policy measures with a property tax system.

“Officials want unlimited access to land leasing fees because they can be raised and spent with little scrutiny, and they can generate a large amount of revenue for use during an official’s tenure.”

Once China’s property owners start being the major source of local government revenue through a property tax, they are likely to start demanding some return on their investment.  And that’s the kind of scrutiny that local officials are not known to be fond of.

 

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