China Eyes Property Tax to Combat Speculation

By Matthew Yglesias

One element in China’s housing bubble is that there’s no property tax in China, so there’s no cost to buying an apartment and then just holding on to it, thus using the house as a store of value. Accord to Patrick Chovanec this “store of value” mode of acquisition—rather than speculative purchases with an eye toward “flipping”—is the main thing driving Chinese to accumulate multiple homes. The country’s innovation-averse bank regulators have created a situation in which there aren’t a ton of attractive investment opportunities, and a home is viewed as a safe place to park one’s money.

This in turn is based on the analytic error of believing that economic growth means that home prices will only go up. One could attribute that error to the fact that Chinese people have very little historical experience with real estate transactions, but Americans made it too in the 1996-2006 period.

But now the Chinese authorities seem to think they can turn the situation around by leaking to the press plans to implement a property tax. That should make it costly to just sit on empty properties, prompting people to sell their excess homes and driving prices down. Housing speculation in China is basically done without leverage, so a price drop shouldn’t imperil the underlying financial system (commercial real estate is a different issue). Instead it would be a kind of transfer of wealth from richer-than-average to poorer-than-average Chinese, though it’s not clear this tax strategy will work. But the evolution of Chinese policy in this regard is very interesting. There’s lots of sentiment nowadays that the Fed should have tried to pop the housing bubble, but there’s still a strong sentiment in the west that it’s a mistake to try to identify and target asset price bubbles. The Chinese evidently disagree and it’ll be interesting to see what kind of results that gets them.