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CHINA PROPERTY
BEAT
PART 1: Regulation
needed
BEIJING - The
red-hot Chinese housing market is close to
spiraling out of control, increasing calls for
tighter government regulation. The situation has
worsened to the point that, for many urban
Chinese, surging housing prices are endangering
their dream of owning a home.
Some
economists attribute the price spiral to
inadequate supply in the market, arguing that
prices will fall as supply increases. This is in
line with classical economic theory, which says
that in a competitive market, as supply goes up
prices usually go down.
However, the
economic nature of housing in China suggests that
supply-and-demand theory may not apply in a
straightforward way to the Chinese housing market.
Housing is not a consumer good to most Chinese,
but an investment - a feature that makes its
price-setting mechanism markedly different from
ordinary commodities. In the market for investment
goods, no price equilibrium exists. Rather, the
prices of such goods are usually decided by their
expected returns. Furthermore, housing is a
quasi-public good, like water supplies or health
care, and has a social dimension, and the
government is usually held responsible for
providing public goods.
In China, rapid
urbanization in recent years has led to an
explosion in the urban population and a severe
shortage of housing in many cities. Many observers
argue that in order to solve these problems, the
government has to step into the property market,
because housing development and other public
infrastructure projects are part of the
government's overall planning strategy.
Another reason why the government needs to
intervene in the housing market is the negative
effects resulting from real estate developers'
market segmentation strategy. Market segmentation
is a strategy used by enterprises to tailor their
products to different consumers or different
market layers in order to maximize returns. The
low purchasing power of low-income groups often
leads them to be ignored by enterprises using
market segmentation, which tend to cater to the
needs of high-income groups. This phenomenon
appears to exist in China's housing market. Cities
are now filled with luxury flat projects, but a
chronic shortage of low-income housing continues.
In order to guarantee that low-income families'
housing needs are met, the government should
provide them with low-rent homes or set up a
housing security system. In this sense, government
intervention in the housing market would not only
better optimize social resources, but also be
conducive to achieving social justice.
The
state of the housing market also makes government
intervention a pressing task. The property market
has witnessed four consecutive years of sizzling
growth since 2001. Investment has risen sharply
and, despite soaring prices, sales are brisk. In
many cities, the amount of housing sold exceeds
the number of units being built, lowering the
vacancy rate.
But neither investment or
sales volume should be used as a reference point
to judge whether the housing sector is
overheating, nor should the gap between demand and
supply be similarly used. Unlike ordinary
commodities, housing purchases usually involve
huge amounts of credit, both for developers and
for home buyers. The current brisk house sales and
good returns does not necessarily mean ultimate
returns will be as good. The current boom will
spur developers to build more homes which may
exceed future demand in the market, resulting in a
glut. So individuals and developers could end up
with a huge amount of bad loans - a scenario which
has already played out many times in other
countries.
For the property industry, the
growth of urban residents' disposable income
should serve as the reference point when making
building decisions. If the growth of disposable
income and the amount of housing available are not
parallel, it could mean the real estate industry
is not on a sustainable path, or that spending on
home buying is affecting other forms of
consumption. The numbers suggest that this is what
is happening in the country now. According to the
National Bureau of Statistics, urban residents'
disposable income grew annually by 10% on average
from 2000 to 2003. But home sales increased
annually by 30% on average during the same period.
In 2003, total housing spending as a portion of
urban residents' total disposable income amounted
to 16.7%, a figure that was higher than the United
State's in 1999, which was 13.65%.
Housing
prices in some cities, including Beijing, Shanghai
and Hangzhou, have shot up to a degree that they
are now way beyond ordinary people's reach. This
phenomenon should be taken seriously. If there is
not prompt and powerful government intervention, a
serious housing bubble will be in the making. And
exorbitant, rising house prices will drastically
worsen the lives of the wave of migrants currently
moving into cities all over the country.
Recommendations for action
First, a special body should be set up to
handle the public housing issue. One model might
be the Hong Kong Home Authority, a quasi-official
agency which is responsible for determining and
implementing public housing programs there. A
similar body could be tasked to protect low-income
groups when the government's economic development
targets are at odds with the provision of public
housing.
Second, the following measures
should be considered immediately:
An information network for the housing market
should be set up. Providing transparent
information to prospective homebuyers could
prevent the market from being manipulated by some
players, as is now the case.
Government policies on tightening land
management should be followed to the letter.
The government should increase the supply of
public housing for low-income groups.
Lastly, a high rate of tax could be levied on
house buying to curb property speculation.
The feasibility of a new property
tax
An official with the Taxation
Department of the Ministry of Finance stated
recently that "property tax" and "real estate tax"
are two different things, and while China is
studying the possibility of a new property tax, it
is unlikely to impose the tax in the short
term.
According to Huang Hua, associate
professor of the Central Finance and Banking
University, "real estate tax" is not an apt term
for the new tax under consideration. China began
collecting real estate tax in the 1950s, and the
tax reform law in 1984 divided real estate taxes
into housing taxes and land-use taxes. Legally,
the concept of real estate tax is ill-defined,
because housing taxes are a tax on assets per se,
whereas land-use taxes are a kind of tax on the
use of an asset.
China has defined the
property tax now being considered as a kind of
assets tax. However, because land is not
considered private property in China, Yue Shumin,
associate professor of the People's University of
China, does not think it is proper to define land
use tax as an assets tax. Therefore, the new
property tax and real estate tax as previously
defined are distinct concepts.
During the
discussions regarding the property tax, most
experts suggested that collection of taxes such as
the value-added tax on land, the contract tax and
the stamp tax be shifted from the period when
housing is being built and traded to the period
when houses are actually being used. The
justification for this was the belief that housing
prices would drop if the numerous taxes that now
apply during the construction and trading period
were abolished. However, Huang believes that there
are many factors influencing house prices of which
taxes are only one, and therefore, it cannot be
assumed that collection of a new property tax
would dampen house prices as the government
intends. One recent example that supports this
contention is what happened in the city of
Hangzhou, the capital city of east China's
Zhejiang province, which started to collect an
individual income tax on the trading of homes on
January 1, 2004. The move did not curb housing
prices; instead, it boosted prices, and the city
had to stop collecting the tax in September 2004.
According to experts, due to such issues,
it is not necessary for home buyers to worry about
the imposition of a property tax at present,
because related tax regulations, collection
measures and tax rates have yet to be announced.
Although there are different opinions about the
contents of the proposed property tax, there is a
consensus that China should be prudent in the
collection of property taxes, and should find a
balance between curbing overinvestment and
ensuring people's living conditions.
According to authoritative sources, four
prerequisites are needed for the collection of
property tax: clear-cut property rights; clear and
definite relations between ownership and
management; a fair appraisal institution; and a
complete real estate tax system. Experts do not
expect property taxes to be collected until 2006
at the earliest.
Tomorrow - Part 2: Focus
on Beijing
(Asia
Pulse/XIC) |
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