One month after Shanghai and Chongqing launched a pilot property tax project, a heated public debate is raging on whether such a tax should be introduced throughout the country. Two scholars differ in views.

Liu Guiwen

A measure in the right direction

The imposition of a property tax is cooling housing prices in Shanghai and Chongqing municipalities, especially in Chongqing which now taxes all villas and new apartments sold above the average price.

Chongqing imposed its property tax on Jan 28, charging 0.5 percent of the transaction price a year for villas and apartments that cost less than three times the average price. The property tax rate for villas and apartments sold between three and four times the average price is 1 percent and for those that cost more than four times the average, 1.2 percent.

Some people still say a property tax is "illegal". But that is not true because way back in 1986 the State Council issued the Temporary Regulations on Real Estate Tax which said local governments could levy property taxes. Since a property tax is the domain of local governments, they can decide its rate according to local conditions. Local governments can modify property tax rules, too, because they are based on the State Council's regulation instead of law.

This should make debating the legality of a property tax a waste of time. The focus, instead, should be on whether a property tax can turn the property market growth in a healthy direction. My answer to that is "yes".

By March 1, Chongqing had collected about 150,000 yuan ($22,838) in property tax from 17 homeowners - mostly high-end apartment owners and real estate speculators. Though the amount is rather small, the Chongqing government expects to collect 150 million yuan in property tax by the end of this year and use most of the tax revenue to build public rental houses. In three years, it will spend about 100 billion yuan to build such houses which will have a combined area of 40 million square meters.

Many will argue that despite imposing the property tax housing prices in Chongqing increased 0.49 percent month-on-month in February and the average housing price was still 6,661 yuan per square meter. They, however, should know that the business volume of Chongqing's real estate market has already shrunk, indicating that developers, speculators and intermediates are on the back foot.

The property tax is the strongest measure yet taken to deflate the property market bubble and should be welcomed for three reasons. First, it will help narrow the gap between the rich and the poor in Chongqing, because the local government will use the tax revenue to build public rental houses.

Second, a property tax will gradually reduce local government's dependence on transfer of land-use rights for revenue. The dependence can be gauged from the fact that in 2010 alone, Chongqing reportedly made 32.6 billion yuan from land revenue, about 16 percent of its total of 199.1 billion yuan. The amount Chongqing expects to collect in property tax this year may be too small to offset its earning from land revenue, but Chongqing Mayor Huang Qifan has said the tax will be extended to personal high-end and many privately owned houses at an appropriate time.

Third, a property tax will curb speculative investment in the real estate market because of the rising cost of owing a house, especially a bigger or highly expensive one.

According to a recent nationwide online survey by China Youth Daily, 92.9 percent of the respondents said the imposition of a property tax would influence their plan to buy a house. More than 45 percent said they would postpone buying and 24.9 percent said they had given up the idea altogether.

Property tax is expected to especially curb the demand for high-end apartments, which more often than not are bought by investors and speculators. Once this happens the prices of such houses will start dropping, which in turn will reduce the flow of speculative funds and the home-buying frenzy.

But a property tax alone cannot fix the real estate market. Though the tax will increase the cost of owning more houses, its rate is limited and can hardly reduce housing prices in the long term. So to deflate the housing market bubble, the government has to take more comprehensive reform measures. It should use property tax revenue to build public rental and affordable houses for low- and middle-income groups, and establish a more diverse system of housing supply that will have far-reaching consequences on the property market.

It is apparent that the property tax now focuses only on high-end houses. But all local governments should use the policy to cover other sectors. The development of the housing market has been problematic across the world, and China is no exception. But policies like public rental housing programs and property tax are moves in the right direction to make buying or renting a house more affordable for people.

The argument that the increased cost of owning more than one house as a result of the property tax will be transferred from investors to common homebuyers and tenants is somewhat distorted. Property tax can affect the real estate market but it is mainly affected by the demand-and-supply relationship. Overall, property tax will have a positive effect on lowering demand and thus housing prices.

Liu Guiwen is a professor in the Faculty of Construction Management and Real Estate of Chongqing University. These are excerpts of his interview with China Daily's He Bolin.