Beijing property tax
Comment of the Day

December 22 2014

Commentary by Eoin Treacy

Beijing property tax

Eoin Treacy's view

Mrs. Treacy’s Wechat group is comprised of her friends and former schoolmates from Beijing. It tends to be quite an active forum for discussion on just about everything besides the Party. She was telling me over breakfast this morning that the main topic of conversation at present is on the implication of a wider introduction of property taxes.

The government has signalled for some time that it wishes to reform the personal tax system and to introduce a property tax of approximately 2.8%. As one can imagine these measures continue to meet with considerable resistance from vested interests, not least those with large property portfolios. 

Nevertheless, a property tax is essential if China is to meet the challenges posed by massive over investment and corruption in the planning sector. Local governments have relied on land sales for a long time and need an alternative source of income if the property development growth model is to be retired. Additionally, municipals will need an additional source of income as this evolution occurs because their loans to property developers run higher risks of default.   

Properties are generally delivered in a raw state by the developer without even first or second finishing. It is left up to the buyer to complete all additional improvements in order to bring the property up to a suitable living standard. This means that when property investors buy for appreciation they have less incentive to spend additionally and often leave the property vacant as they wait for prices to appreciate. The threat of a property tax increasing holding costs represents a headwind for the property sector. 

By the same token, money coming out of property represents a potentially important tailwind for the stock market.  

 

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