SHANGHAI: China’s finance minister, Xiao Jie, recently outlined the principles and roadmap in relation to rollout of a property tax. The message was included in a book that was published to help the public understand the lengthy work report that President Xi Jinping delivered to the 19th Party Congress last month.
Hong Kong has no property tax. The closest thing to that in the territory is “Rates and Government rent”. Currently, property owners need to pay around 3 and 5 percent of annual rental income as rates and government rent. For instance, property owners pay around HK$8,000 per year in rates and government rent for annual rental income of HK$100,000 for a property.
This is relatively cheap compared to property tax levied in other countries, which are usually based on the market value of the property.
For example, US property owners need to pay 1 to 3 percent of their property value as property tax. That means the owner of an apartment with market value of HK$4 million needs to pay HK$40,000 to HK$120,000 as property tax. Therefore, the holding cost of properties is much higher.
It’s widely believed that China will follow the American style property tax, in order to cool down the red-hot housing market in a more effective way.
In fact, Chinese authorities have been mulling over the idea of property tax since late 1990s. But they have held back from launching it, for fear of bringing a dramatic shock to economic growth.
After all, the housing sector is one of the pillars underpinning the nation’s economy, and local governments also rely heavily on land sales revenue. But now, China’s housing market has become quite mature, with existing commercial housing units reaching nearly 500 million.
As the nation’s new-home sales growth has started to moderate this year, it’s a good time for the authorities to introduce property tax.
Xiao has revealed three basic principles of property tax introduction. First, the tax will be based on market price of the property; second, the authorities would prepare the legal framework first before implementation; and lastly, local authorities would be granted more flexibility, implying it will be a gradual process and that practices of different cities would vary.
For example, the property tax will be launched in big cities first, where home prices have been spiking in recent years. It is believed most local governments would prefer a lower property tax rate in order to keep their cities competitive.
Introduction of the new tax does not necessarily spell bad news for property developers. After all, their business depends on underlying supply demand and macro issues like interest rates and liquidity.
Shanghai and Chongqing have already adopted a property tax pilot scheme since 2011. But both cities have seen their home prices skyrocket over the years. It’s the same case we’ve seen in London, New York or Toronto.