Shanghai and Chongqing offer hints of how China’s property tax would work, and be ignored by runaway home prices

·6-min read

Shanghai and Chongqing, two of China’s biggest urban centres, offer a hint of what a property tax would look like as the Chinese legislature gave its nod last week to kick off the tariff after a decade of stop-go measures to rein in runaway home prices.

The two municipalities, with a combined population of almost 60 million residents, were the test beds in 2011 for a tax that still remains, although its nationwide roll out was deferred two years later when Xi Jinping took over as president, along with a new line-up of ministers and regulators.

The tax, enforced by the municipal tax authorities of Shanghai and Chongqing, leaned heavily against non-residents, and owners of more than one home, especially large, expensive property.

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A resident who opts for a second new home exceeding 60 square metres (645 square feet) would be liable for an annual levy of between 0.4 per cent and 0.6 per cent of the property’s fair value, calculated on the area that exceeds the minimum. Non-residents – defined by China’s household registration system, or hukou – buying their first homes will be charged a 0.6 per cent tax rate if the purchase price is double the city’s average price in the preceding year.

Chongqing, located in south-western China near the Sichuan provincial capital of Chengdu, levies a progressive property tax starting at 0.5 per cent, going up to 1.2 per cent. The tariff applies to owners of existing and new villas, as well as new apartments that cost more than double the average price of new homes in the metropolis. Non-residents buying a second home in Chongqing will also be subject to a tax.

Source: National Bureau of Statistics. SCMP Graphics
Source: National Bureau of Statistics. SCMP Graphics

There is little evidence that the property tax was an effective cap on home prices, not least in Shanghai or Chongqing, where the levies remain in place.

The average home price in Shanghai has jumped 155 per cent since 2011 to 54,428 yuan per square metre, according to E-House China R&D Institute in Shanghai, from 21,374 yuan when the tariff was imposed. In Chongqing, average prices grew 108 per cent to 14,501 yuan per square metre in September, from 6,969 yuan per square metre in 2011.

The property tax is unlikely to derail the long-term price trend even if it increases the holding cost in real estate and poses short-term downside risks, said ANZ’s senior China economist Betty Wang.

Homebuyers crammed a sales room in Tsim Sha Tsui to vie for 228 apartments on offer by Sino Land at the Mayfair By The Sea 8 project in Hong Kong on January 23, 2019. Photo: Handout
Homebuyers crammed a sales room in Tsim Sha Tsui to vie for 228 apartments on offer by Sino Land at the Mayfair By The Sea 8 project in Hong Kong on January 23, 2019. Photo: Handout

Still, the Chinese government is pushing for the tax as part of its decade-long struggle to rein in prices in the 16 trillion yuan (US$2.5 trillion) real estate market. The government, harking to its socialist roots, is anxious to make housing affordable to young families and first entrants on the property ladder, particularly during politically significant periods such as the ruling Communist Party’s centenary in 2021.

It is also part of Chinese President Xi Jinping’s “common prosperity” campaign to redistribute wealth and to address widening social inequality, in a nation where more than 40 per cent of urban households are estimated to own at least two homes.

Last week, the Standing Committee of the National People’s Congress (NPC) delegated the State Council to launch a five-year property tax programme in selected regions. The targets of the proposed tax include owners of residential and commercial properties but exclude legally owned rural homes. Ten cities including Shenzhen, Haikou and Hangzhou will take part in the pilot, according to a report by Reuters, down from the original 30 mooted due to strong opposition to the plan.

Source: Company reports. SCMP Graphics
Source: Company reports. SCMP Graphics

The Chinese government has introduced a series of administrative measures since 2017 to cool the housing market, from capping home prices, limiting bank loans to restrictions on how much land developers get access to. A trio of lending caps, known as the “three red lines,” came into force in August 2020, severely curbing the debt-fuelled building binge by real estate developers.

The United States has a property tax that ranges from 0.5 per cent to 2.13 per cent per annum, while the UK applies a tax of 1.93 per cent, according to the Tax Foundation’s website. Hong Kong, with its own tax regime, charges 5 per cent as a levy based on the estimated annual rent of the property.

“It will take reference from tax regimes in mature markets, and make it fit into China’s context,” said Sam Xie, head of research at CBRE China, adding that the proposed property tax will allow room and flexibility for local authorities to implement the tariff at their discretion and based on the conditions in their markets.

An architectural model of Cheung Kong Property (Holdings)’s Harbour Glory project in Tsim Sha Tsui on 26 April 2017. Photo: EPA
An architectural model of Cheung Kong Property (Holdings)’s Harbour Glory project in Tsim Sha Tsui on 26 April 2017. Photo: EPA

A property tax should be simple and straightforward, said Delotte’s tax partner Winnie Shek.

As an ad valorem tax, it is levied on ownership and the assessed value of the property. There are different taxes, either distinguished by the types of real estate (e.g. tax on land only, tax on property only, or tax on land and property inclusive), or by their categories (e.g. residential, commercial and/or industrial).

The exact tariff depends on the actual circumstances, including but not limited to land resources, economic situation, stability of property market, of each of the jurisdiction.

The tax, levied on individuals, will also be unlikely to shake growth of real estate investment trusts (Reits), which were launched in May to help developers create new financing sources from their property portfolios.

“The property tax is aimed at individuals with multiple properties who are currently exempted from the scope of corporate real estate taxes,” said Delotte’s Shek. “Subject to the stipulation of the actual provisional rules, we do not expect the rolling out of the new property tax pilot would affect Reits.”

Workers at a new property development project in the Hainan provincial city of Sanya on October 13, 2016. Photo: AFP.
Workers at a new property development project in the Hainan provincial city of Sanya on October 13, 2016. Photo: AFP.

As an additional source of tax income, the property levy will do little to bolster China’s financial coffers, analysts said.

China’s local authorities get the lion’s share of their revenue from renting out land-use rights to developers, earning 8.4 trillion yuan last year, or 84 per cent of local fiscal revenues in 2020, according to the finance ministry.

“It’s questionable whether the property tax revenue is large enough to become a major revenue stream for local governments,” said ANZ’s Wang. “Property tax revenue may only be a fifth of the receipts from land sales even if it were to be implemented nationally, far from enough to replace land sale revenue.”

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