Real estate tax once again hangs over the real estate industry.
Recently, Lou Jiwei, former Minister of the Ministry of Finance, published an article entitled "China’s Financial System Reform and Future Outlook in the New Era", which pointed out that real estate tax is the most suitable tax as a local tax, and it should be piloted as soon as possible after the economy turns to normal growth.
Some market participants believe that this means that the pace of the real estate tax pilot is approaching. As the direction of land financial transformation and one of the important means to adjust income and wealth distribution, the landing of real estate tax is the general trend. In 2021, the work of expanding the pilot of real estate tax was accelerated. However, under the downward trend of the real estate industry, the Ministry of Finance suspended the expansion of the real estate tax pilot in early 2022 for the sake of stable real estate and steady growth.
Many insiders believe that under the pressure of economic development, the real estate tax pilot will not be rashly promoted. It is expected that the implementation time of pilot cities in the future will still be determined in combination with the recovery of the real estate market and the macroeconomic operation.
Difficulties in real estate tax legislation
Levying real estate tax is the general trend after the shrinking land finance?
Photo photography: Ren Yuming
Guo Xiangyu and Yu Jian, researchers of Real Estate Finance Research Center of Tsinghua University Wudaokou Finance College, pointed out in a research report in February this year that due to the downturn of the real estate industry, the income from land transfer fees, which plays an important role in local finance, decreased by 25.9% in the first 10 months of 2022. With the transformation of the underlying logic of the real estate industry, the local land financial mechanism will be difficult to sustain, and it is urgent to seek a way of transformation. Promoting real estate tax reform is an important transformation direction in exploring more sustainable and long-term "open source" ways.
"Compared with land transfer, real estate tax is a tax financial source, which is healthier and more sustainable for local governments." The above report points out that the real estate tax can effectively supplement the local government’s finance on the one hand, and it is of greater significance for the stable and healthy development of the real estate industry and the promotion of common prosperity of society on the other hand.
Xie Haoyu, a real estate industry analyst of Guotai Junan Securities, also believes that on the one hand, the land finance is weak, and it is difficult to rely on the income growth of land transfer fees in the future. On the other hand, the market-oriented regulation of the industry development with demand-side reform is conducive to the industry’s moving towards reasonable competition and obtaining effective demand is the long-term growth path of the industry.
Chen Wenjing, director of market research of China Central Finger Research Institute, told the First Financial Reporter that the legislation and reform of real estate tax is a medium-and long-term task, which is conducive to curbing the speculative nature of real estate to a certain extent and stabilizing the development of the real estate market in the medium and long term.
But in fact, it is not easy to levy real estate tax, and the legislative process is facing many difficulties and pain points.
Chen Wenjing pointed out that in terms of implementation conditions, the current national unified housing evaluation standard and system have not yet been established, and the tax authorities also lack the experience and foundation for direct taxation of individuals and families. The current tax collection and management law needs to be appropriately adjusted and revised, and the supporting tax system reform needs to be promoted simultaneously. There are also some difficulties in real estate tax design, such as the scope of collection, exemption conditions, tax rate level and tax preference.
Lou Jiwei focused on the valuation of real estate in the above article, and thought it was the biggest difficulty in the legislative process. He pointed out that real estate valuation should generally be based on houses with complete property rights and unrestricted transactions. In reality, a large number of housing property rights are incomplete and transactions are limited. The solution is to make appropriate discounts based on the benchmark valuation, but the problem is very complicated. There are many other difficulties, which have led to the fact that the tax law has not been formally enacted for many years. In October 2021, the National People’s Congress Standing Committee (NPCSC) authorized the State Council to carry out real estate tax reform in some areas, which can be said to be an exploration with problems.
Has significantly affected market expectations.
Real estate tax is nothing new in China. As early as 2003, the Third Plenary Session of the 16th CPC Central Committee proposed to levy a unified and standardized property tax on real estate when conditions are available. In January, 2011, Shanghai and Chongqing took the lead in launching the pilot project of property tax, and levied property tax on individual housing.
In 2015, the Third Plenary Session of the 18th CPC Central Committee formally proposed to put the real estate tax reform into the "legislation first" track. After the 19th National Congress of 2017, it was established to promote the legislation and implementation of real estate tax in accordance with the principle of "legislation first, full authorization and step-by-step promotion", and gradually establish and improve a modern real estate tax system. In September, 2018, the real estate tax appeared in the 13th legislative plan of the National People’s Congress Standing Committee (NPCSC).
Since 2021, the attitude of the regulatory authorities on real estate tax has obviously become frequent, and related work has accelerated. In March of that year, the "14 th Five-Year Plan" mentioned "promoting real estate tax legislation"; In May, the Ministry of Finance, the State Administration of Taxation and other four competent departments held a pilot symposium on real estate tax reform. By October 23rd, 2021, the National People’s Congress Standing Committee (NPCSC) decided to authorize the State Council to carry out the pilot work of real estate tax reform in some areas.
Regarding this pace of promotion, Zhang Yu, a real estate analyst of CICC, admitted frankly that although there have been many trends in property tax in 2021 and the market has expected the real estate tax to accelerate under the background of common prosperity, the arrival of the real pilot action so quickly still made the market feel more than expected. At that time, Kerui predicted that there was only time left before the real estate tax pilot finally landed. It is expected that the pilot cities will land the specific implementation rules of real estate tax in early 2022.
These have a direct impact on market expectations. A real estate enterprise in South China told reporters that, for example, a pilot project in a first-tier city may have an impact on the market expectations of a second-tier city. At the same time, if the real estate tax is levied at a high level, it may also cause considerable downward pressure on housing prices, which in turn will affect the overall real estate market.
The research team of Poly Development also showed the influence of real estate tax on customers in key 40 cities. According to its industry white paper released in April, 2022, 75% of the 1,400 groups of customers with home purchase plans in the past six months gave up buying or waiting to see, and actively delayed entering the market.
"In the process of waiting for the boots to land, the real estate tax also has a far-reaching impact on the customer’s purchase logic, from buying small and buying more (sets) in the past to buying less, buying moderately and buying fine in the future." The above-mentioned industry white paper believes that in the medium and long term, the expectation of real estate tax will trigger a logical shift in household asset allocation.
This may also be one of the key factors that affect the progress of the real estate tax pilot. In the second half of 2021, developers’ thunder incidents occurred frequently, the land market cooled significantly, the turnover of 100 cities shrank, and the real estate industry continued to decline. In this context, in March 2022, the real estate tax was suspended to expand the pilot. Lou Jiwei said that considering the current economic situation, it is of course realistic for the Ministry of Finance to announce that it does not have the conditions to expand the pilot cities for real estate tax reform in 2022.
The industry is not expected to advance in the short term.
Under the general policy of "housing without speculation", will the real estate tax pilot be expanded in 2023? Many people in the industry interviewed believe that it is unlikely in the short term.
"Judging from the current market situation, China’s current economic situation is still in the initial recovery stage. In the environment where uncertainties in world economic and trade growth are still outstanding, the challenge of China’s steady economic development is still great. As a pillar industry of the national economy, the stable recovery of real estate is of great significance for stabilizing the economy. " Chen Wenjing believes that the pilot implementation of real estate tax will have a greater impact on residents’ expectations of buying houses, and increasing the transaction pressure in the commercial housing market will also drag down the pace of market recovery, which is not conducive to the steady recovery of the economy.
Yingda Securities believes that in the context of macroeconomic pressure, there is no condition to expand the pilot city of real estate tax reform in 2023. Ma Guangyuan, an economist, also pointed out that although there has been a rebound in real estate this year, and all indicators are better than last year, the overall expectation of real estate has not reversed, the industry is still in the adjustment period, and the risks have not been lifted. The adjustment of real estate is one of the main risks facing China’s economy at present, and the top management is still emphasizing the risk prevention of real estate. In this case, the pilot real estate tax is not realistic.
However, the industry expects that the real estate tax pilot will still be steadily promoted in combination with the actual situation of different cities, and accumulate experience for real estate tax legislation. Lou Jiwei’s point in the above article is that "the pilot project should be carried out as soon as possible after the economy turns to normal growth". Some unnamed real estate industry analysts believe that this also means that the real estate tax pilot will not be rashly promoted when economic development and market performance have not improved.
As for the possible pilot cities, CICC mentioned in the previous research report that the pilot may take the lead in cities and regions with relatively weak supply potential of new houses, urgent need to optimize the demand structure, relatively developed economy and good basic conditions. The number of cities under this standard will not be too much, and there is a high probability that the pilot will be launched in batches.
Yu Xiaoyu, research director of Yihan think tank, believes that some cities with high market enthusiasm and high expectations of rising house prices will be more likely to be shortlisted for the pilot cities. It is expected that the first-tier cities in Shanghai, Guangzhou and Shenzhen and the core second-tier cities such as Hangzhou will be shortlisted for the real estate tax pilot cities, and the policies of the cities that have already been piloted may continue to deepen the pilot. The forecast list given by Kerui includes Shanghai, Shenzhen, Guangzhou, Hangzhou, Nanjing, Suzhou, Xi ‘an and other cities.
According to the forecast of Xizheng Capital, the tax rate introduced by local governments in pilot cities in the future will not be too high, which means that it may mainly refer to the existing pilot tax rates in Shanghai and Chongqing, such as 0.4-0.6% in Shanghai and 0.5-1.2% in Chongqing. In terms of the scope of collection, the pilot is likely to include all the existing houses in the scope of taxation, but it is highly probable that the first suite and some areas will be exempted.
