Speculators in China may face tax on property holdings

HONG KONG: Beijing should impose a real estate tax on speculative investors in order to rein in the red-hot property market, a leading government think tank said on May 5.

The Chinese Academy of Social Sciences advised the central government to gradually move away from the existing tax on property transactions as this effectively passes the burden on to the buyers in the form of higher prices.

Instead, it suggested a tax be imposed on existing residential property holdings to increase costs for speculators.

"Such a tax is good for controlling property speculation," said Li Jingguo, a director of the land and property research bureau of the urban development and environmental research institute at the academy.

Under the plan, property owners would be taxed on the basis of the number of units they hold or the total gross floor area, according to Li.

Academics and analysts believe the suggestion is aimed at testing the market's response.

"We cannot conclude that the central government is going to introduce this property tax but I see it as a move to test the waters," said Chen Jie, a deputy director of Fudan University's centre for housing policy studies. "There are a lot of problems to be considered before the introduction of such a tax. If it leads to a drastic fall in home prices, that could harm the banking system."

In its report, the think tank suggests that flats used as a primary residence should be exempt from the proposed tax as long as they meet certain criteria. It did not elaborate.

Last month, there was speculation that Shanghai and Chongqing may set a levy on investors holding luxury homes that they either leased or left vacant to bet on capital appreciation.

The report also recommends simplifying the mainland's property transaction tax system by eliminating some taxes.

Transaction taxes are often just passed on to the buyers in the form of higher prices, and therefore have become a factor in price rises, it said.

In some cases, they could lead to problems they were intended to solve, according to Li.

The suggestion came as home prices rose an average of 25% last year, far beyond the 9.8% growth in residents' disposal income per capita in urban cities.

Li said prices in first-tier cities would drop in the second half if tougher measures were imposed.

Alan Chiang Sheung-lai, the head of the mainland residential department of DTZ, said a real estate holdings tax had been discussed for a long time, but he believes it will be Beijing's last resort to cool the market.

"If sales volumes have not cooled down and prices do not fall amid the current measures, the central government may roll out the tax," Chiang said. "However, it seems the market has started slowing."

He expects home prices in first-tier cities this year would fall 22% from the first quarter.

Transactions in major mainland cities fell during the May Day holiday -- traditionally a hot season for home sales. In Beijing, only seven new units were sold during the holiday.

Standard Chartered Bank economist Kelvin Lau said Beijing would continue to lift reserve requirement ratio regularly to tighten liquidity. On Sunday, it raised the reserve ratio by half a percentage point from May 10. – South China Morning Post