Land Tax Concerns for Chinese Homeowners and Buyers Amid Xi Jinping’s Common Prosperity Campaign

“We must actively and steadily push forward land tax legislation and reform, and carry out the pilot projects well,” President Xi Jinping said in August when he explained his vision of leading the Chinese people to the so-called common prosperity, with the property tax being one of the main objectives. some specific policies mentioned.

Homeowners and potential buyers must now consider their potential liability for future taxes, which reduces property values
Rosealea Yao

After years of debates over the first recurring property tax, with only real estate transactions currently taxed in mainland China, a property tax law will be “promptly” drafted once the pilot projects are completed.

Under the law, both residential and non-residential properties will be taxed based on their value, but rural households will be excluded.

Although no further details of the tax plans were revealed, the prior announcement underscored the determination of China’s top leaders to launch the nationwide property tax.

“Homeowners and potential buyers must now take into account their potential liability for future taxes, which reduces property values,” said Rosealea Yao, analyst at Gavekal Dragonomics in Hong Kong.

The proposed tax rate is still unknown, but if it is 1%, future tax payments will equal 20-40% of a property’s value today, given the standard term of 70 years. property rights in China, which represents a big change in household balance sheets, according to Yao.

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World’s most indebted developer China Evergrande Group saves time to pay off more creditors

“Since the housing cycle has turned around quite quickly in recent months, the tax announcement risks amplifying the continued decline in prices and sales,” she said.

Private ownership of properties in China didn’t start until 1998, but despite its relatively short history, Shanghai, Shenzhen and Beijing are only just behind Hong Kong on the list of the world’s most expensive housing markets.

Local governments gain a a significant portion of their income from the sale of land – 8.4 trillion yuan ($ 1.3 trillion) last year, compared to 10.1 trillion yuan from taxes, with the cost ultimately borne by the buyers themselves.

Betting on huge demand supported by rapid urbanization, the Chinese wealthy have accumulated properties, waiting for prices to rise and sell them to become new millionaires and billionaires.

Average unit prices in China’s four so-called first-tier cities have tripled over the past decade, to about 55,500 yuan (US $ 8,693) per square meter, from about 18,000 yuan in 2009, according to data from China Real Estate Information.

But to highlight the scale of the problem, the annual per capita disposable income of Shanghai, the highest of the mainland cities, was 72,000 yuan last year. Across the country, average income has doubled since 2010, but only to reach 32,000 yuan last year, according to the National Bureau of Statistics (NBS).

In the tech hub of Shenzhen, where real estate prices have skyrocketed in recent years, the average cost of buying an apartment was 43.5 times the average annual salary of local residents last year, according to a study by the E-house China Research and Development Institute.

As a result, Chinese Generation Z and its young millennials choose to “lie flat” – do the minimum to get by in part because their income does not make it possible to catch up with the soaring house prices.

Known for his slogan “housing is for living, not for speculating,” Xi has bombarded the real estate market with crackdowns on speculative investment in recent years.

Under his leadership, mortgage rates, restrictions on second home purchases and taxes on property sales increased, while rules on lending to developers were tightened.

A hard landing in the real estate market poses a limited threat to the financial system, but would have a severe impact on China’s real economy
Researchers of the China Finance 40 Forum

Evergrande Group, the most indebted developer in the world, has stumbled from maturity to maturity in recent weeks as it grapples with more than US $ 300 billion in liabilities, including US $ 19 billion in US dollar bonds.

It took the world by storm after missing several interest payments to offshore bondholders in September and worried Chinese homebuyers.

The US Federal Reserve warned earlier this month The struggling real estate sector in China could present “some risks” to the US financial system, underscoring recent concerns over Evergrande, as the Chinese government has shown little interest in bailing it out.

“A hard landing in the real estate market poses a limited threat to the financial system, but would have a severe impact on China’s real economy,” China Finance 40 Forum researchers led by Zhang Bin wrote in an article by Caijing magazine last month.

“A property tax is necessary and good for the long term. However, better timing is needed to avoid serious negative effects on property sales in the short term. “

Abandoned Evergrande theme park in China's Jiangsu province

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Abandoned Evergrande theme park in China’s Jiangsu province

The real estate sector has long been China’s flagship industry, accounting for a quarter of gross domestic product (GDP) when indirect effects are included, as it can impact demand for steel and cement for no name a few.

This heavy dependence has not changed even since China tried to rebalance the economy towards more consumption and away from investment and industry.

Production in the real estate and construction sectors fell 1.6% and 1.8% respectively in the third quarter of this year, according to official data.

The growth rate of real estate investment slowed to 8.8 percent from January to September, from 10.9 percent in the first eight months of the year. New housing starts in the first three quarters also fell 4.5% from a year ago.

Weak real estate and construction weighed heavily on the Chinese economy as GDP growth slowed to a worse than expected 4.9 percent in the third quarter, as Beijing’s tightening measures in the market and a debt and liquidity crisis in Evergrande began to trickle down to the economy.

Last month, housing starts and real estate deliveries fell 33% and 21% from a year earlier, respectively, while real estate investment in October fell 5.4%.

A survey by China Real Estate Information found that the volume of land sales in 100 major cities fell 6% quarter-on-quarter in the third quarter. Year over year, land sales volumes fell 47%.

In October, amid a rapidly cooling housing market, national house prices fell for the second month in a row. Of the 70 cities in the NBS sample, 64 cities saw house prices drop, down from 52 in September.

In terms of floor space, domestic sales fell 22% year-on-year in October, although real estate sales rose 8% year-on-year in the first 10 months of the year.

If the wait for a property tax worsens the slowdown, China’s economic growth will slow even more, as related industries from steel to cement, engineering machinery and household appliances will all be hit hard. affected, affecting domestic and foreign suppliers, economists say.

A more severe slowdown in the housing market in China than we currently expect would significantly slow down China’s growth and have a major impact on global growth
Louis kuijs

“A more severe downturn in the housing market in China than what we currently expect would significantly slow Chinese growth and have a major impact on global growth,” said Louis Kuijs, head of the Asian economy at Oxford Economics.

The baseline scenario is that the real estate slowdown in China will be “significant but contained”, due to a low stock of unsold homes, room for policy easing, continued urbanization and significant revenue growth, Kuijs added.

However, with medium probability, the drop in real estate could be more pronounced like the fall in real estate in China in 2014-2015.

According to this scenario, real estate investment growth would fall by 8.8% in the fourth quarter of 2022. As a result, Chinese GDP growth would slow to 3.0% and global economic growth would be 0.7 percentage point lower, according to Kuijs.

World metal prices would also fall sharply and countries particularly exposed to China and commodity exporters would be particularly affected. This includes most of the Asia-Pacific economies, led by South Korea, Taiwan, Hong Kong, Malaysia, and Singapore, as well as Germany, Chile, Peru, Australia, and Saudi Arabia.

If China’s residential investment were to collapse as much as it did in the United States and Spain in the 2000s, which is a scenario considered to have a low probability of occurring, overall growth in the China’s GDP would fall to 1.0% in the fourth quarter of 2024, while global GDP growth would be cut by 1.6 percentage points.

“While our baseline forecast for the Chinese real estate sector is for a contained slowdown in 2021-2022 and a gradual decline over the decade, overseas risks and developments could play out differently,” Kuijs said, explaining that the economic repercussions could be significant, not just for China, but the rest of the world.

To avoid an economic crisis, many economists are suggesting in Beijing to ease bank mortgage quota controls, resume loans to struggling skilled developers, streamline taxes levied on properties, and clarify property tax exemptions.

“China should delay the rollout of policies that may have a severe impact on the real estate market in the short term,” wrote Zhang and other economists at the China Finance 40 Forum.

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