Stop the bubble bursting

The value of land sales in China increased by nearly 50 percent year-on-year in the first seven months fueled by the demand for real estate.

The housing market has become white-hot in some cities in recent months, prompting the authorities to vow they will extend the trial property tax to more cities to try and take some of the heat out of the market.

The central government has already introduced a number of measures aimed at curbing house prices, but prices have continued to rise at a fast clip this year.

Some local governments have been busy selling land to raise money to service their debts and maintain normal operations. With a large amount of local government debt maturing by the year's end, a prosperous real estate market remains indispensable for local governments, some of which have reportedly increased the base prices for land sales.

To ease the fiscal pressure of local governments and stabilize the property market, policymakers are keen to assess whether a property tax can be levied right now to become a source of fiscal revenue for local governments, so they no longer have to rely on land sales.

But given the potential dampening effect, a property tax will have on the real estate market, which in turn will affect the national economy since the sector creates demand for more than 40 other industries, we should not expect policymakers to start levying the tax across the country any time soon.

Therefore, it will be very difficult for the central government to accomplish its task of taming home prices.

If home prices continue to rise fast - they have risen by up to ten times in some major cities over the past decade - there is the risk of the property bubble bursting, which would have severe consequences for the national economy. The soaring property prices urgently need to be tamed, as it will be too late to tackle them when the bubble is on the verge of bursting.

The pressing task is to accelerate reform of the taxation regime so that the coffers of local governments will not be affected by any further measures introduced by the central government to stabilize house prices.

(China Daily 08/30/2013 page7)