China's property markets are having a down cycle. Photo: iStock

HONG KONG – Mainland China property prices look set to dip with the launch of a new property tax.

On May 11, China’s Ministry of Finance, the State Taxation Administration and other bodies held a forum in Beijing with local government officials and property experts to discuss the launch of a property tax pilot program in certain cities. Shares of Chinese property developers fell by 2-3% on that day.

According to some mainland newspapers, the pilot program will kick off by the end of this year in some first and second-tier cities. Under the program, homeowners will be required to pay tax based on their properties’ underlying value. The central government may extend the program to all Chinese cities if the pilot program goes smoothly, the reports said.

Beijing’s central government has called for a tax on homeownership since 2011. It chose megacities Shanghai and Chongqing to conduct trials. However, the tax was not extended to other Chinese cities as local governments feared the tax would hurt property and land prices, as well as their fiscal revenue.

Liu Yi, a professor at the School of Economics at Peking University, said the suppression of home prices was definitely one of the reasons for the launch of the property tax. Liu said the tax would create new revenue sources for local governments, which should not rely mainly on land sales revenue in future. She said the robust economic growth in China would provide a suitable environment for the implementation of a property tax.

Liu Wei, senior researcher at the Center for Urban Development and Land Policy at the Peking University Lincoln Institute, said land sales and property tax were income sources for local governments but their use should be clearly defined.

Liu said land sales revenue should be used for land development and compensation for indigenous people while income from property tax should be spent on current expenses such as education, security, public health and fire protection.

Analysts say land sales revenue should be used for land development and compensation for indigenous people. Photo: iStock

Liu said property tax would help local governments improve their services but the levy would not be an effective tool to suppress property prices over the long run.

Squeezing margins

Some analysts said the coming property tax would further squeeze the margins of property developers, which have suffered from new challenges in fund-raising and rising costs.

According to a recent report published by the China Index Academy, Chinese property developers’ average gross margin was 26.2% in 2020, down by 10 percentage points from two years ago.

It said property developers acquired a lot of land sites at high prices between 2016 and 2018 and saw their margins squeezed last year when these expensive sites were used. Property developers were also facing rising construction material and labor costs, which could not be passed to homebuyers due to the price caps imposed by local governments.

They will probably continue to see their margins squeezed in the coming two years as the central government further tightens property rules to cool down prices, according to a S&P Global Ratings report published last month.

If their average gross margin falls further by two percentage points, 70% of Chinese property developers would still operate healthily, said the report. But if it dropped by five percentage points, only half of the developers could survive, it said.

City Gardens private housing estate in North Point, Hong Kong Island. Housing prices in the city are surging. Photo: Google Maps

Last August, the People’s Bank of China and the Ministry of Housing and Urban-Rural Development launched new guidelines for property developers to fulfill certain requirements if they take out loans.

In December, the China Banking and Insurance Regulatory Commission urged commercial banks to improve the management of their property loans and limit the ratios of these loans in their overall loan portfolios.

Total assets of Hong Kong-listed Chinese property developers rose 13.8% to 233.3 billion yuan (US$36.64) at the end of 2020 from a year ago. Last year’s growth rate declined by seven percentage points from 2019.

Price surge in Hong Kong

While home prices in the mainland may see pressure this year, Hong Kong’s property prices are poised to hit record highs.

The Rating and Valuation Department said Thursday that the price index of lived-in homes edged up 0.4% to 390.8 in April from 389.1 in March. If the index grows by a further 1.5% in May and June, it will surpass the historic high recorded in May 2019.

Hong Kong’s property prices have been declining since the anti-extradition protests began in June 2019. Home prices continued to be under pressure after the Covid-19 pandemic broke out in early 2020. Some families also chose to emigrate after the implementation of the National Security Law on June 30, 2020, putting extra pressure on home prices.

However, some people who had failed to buy their home in the past decade have used the chance to enter the market. These people, including social workers, teachers and utility company workers, did not suffer from pay cuts but saved more money by staying home during the pandemic.

Samuel Tse, an economist at DBS Bank, said some homebuyers were anticipating that Hong Kong’s border with the mainland would reopen in the second half of this year, given that the epidemic was recently under control. Tse predicted property prices would continue to increase mildly later this year.

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