Op-Ed Contributors
Debate: Is property tax fair?
(China Daily)
Updated: 2010-03-12 07:52
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Grayson Clarke: Tax could help deflate the bubble
Never mind the statistics. Just look around Beijing's central business district and you will see telltale signs of a bubble - unfinished buildings, rows of unoccupied (high-end) apartments and real estate agent windows displaying rising prices. What is true for Beijing is true for most cities in China.
Probably the most astonishing statistics I have come across in the past year was a report in China Daily in July last year, which said a plot in Shanghai fetched three times the amount it was offered about 12 months earlier when there were no bidders.
What's the reason for this? A friend of mine told me recently that her parents withdrew their flat in Changsha, capital of Hunan province, from sale because housing prices there were almost flat. The major reason for that was the municipal government had helped build houses across different price range because plenty of residential units were available to meet the demand.
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Bubbles have formed in the housing sector because of wrong economic incentives. At present, there are two such incentives. The first is the availability of more incentive to supply than demand. Credit has been made available to developers to finish projects and even start new ones. Banks have been anxious to roll over principal and defer payment moratorium so as not to precipitate problems with developers and increase non-performing loans.
And though there has been some reduction in the level of deposits for buyers, the entry capital needed for first-time buyers is actually rising. Richer households with several flats as collateral can borrow more easily. In fact, they consider property market a good investment because of very low interest rates.
To a large extent, the credit situation is the result of the government's strategy to overcome the global financial crisis, and to some extent the housing bubble is its unwelcome side effect, which the administration is trying to address.
But what has turned a potential bubble into a perfect storm is the financial imperative of local governments to transfer land-use rights in order to earn revenue. This is the second powerful (mis)incentive - local governments get a large part of their revenue from the sale of high-end property and stand to maximize it by controlling the supply of land for development. So no matter what local governments say about their efforts to increase the supply of low-cost houses (and there is no reason to doubt their sincerity) the financial incentive works in the opposite direction.
The need then is to change the local governments' reliance on one-off transfer of land-use rights for their revenue to a system that would ensure permanent and recurrent source of income from property tax. The general agreement is that property tax is a good idea. But as with most changes there is some trepidation over how it can be imposed without destabilizing the property market further and upsetting the large number of families that are already reeling under the weight of heavy mortgage.
There is no magic pill to cure this illness. But a gradual imposition of property tax and financial transparency seem to be the best course of treatment. The first step should be to control the proportion of capital receipts that local governments can use to fund their spending - a tactic used by the UK government in the 1980s to control capital spending of local governments.
Controlling the use of capital receipts, however, does not mean sequestration. It merely means allowing only the interest on receipts to fund spending. In the first instance, the controlled proportion could be focused on the sale of land for high-end development defined through the square meter price. This would provide the incentive to local governments to make more low-cost land available.
Gradually squeezing the incentive to sell high-priced land would also be an impetus to increase revenue from property tax. There are several options for property tax - the list will be too long for this article. But it has two core principles: All property should have liability and taxes should be imposed in line with its potential rental value and the net household income of the occupiers. In the initial stages the focus should be on taxing apartments that are vacant and households that have two or more properties. People whose main homes are mortgaged could apply to use their mortgage or rental payments against the charge - a form of property tax relief. And those with multiple houses could reduce their charge by getting them rented out because such property would be the liability of the occupier.
In the UK, if an owner does not let out his property within six months, he/she has to pay council tax. Such a change could see more flats either being sold or rented out and help reduce housing prices.
China is famous for piloting change and this is a change that is badly needed. Let us be clear, property tax will not prevent bubbles. Property tax has been around in the UK, the US and many other countries for decades and there are still bubbles there. Nor will it be easy to control exemptions to property tax or the use of capital receipts.
In the UK, there was a heavy amount of "game playing" by local governments to avoid the rules. But these changes are one element of an equation that will lead to a more stable housing market and, equally important, a more stable revenue base for local governments.
(China Daily 03/12/2010 page10)
