This is the precise time that government should implement property tax. Instead of let them die a slow death. Just kill them to start a new life. GDP may suffer but you don't need to go through the pain later. The incentives to buy home is already low and no sight of being recovered soon. Who wants to buy for living will buy and who buy as investment will not.
Chinese Economics Thread
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It's more economically optimal to have a sudden crash, yes, but there are also political considerations (unrest, unemployment, vested interests) to keep in mind. Beijing needs the cooperation of local government and stakeholders to achieve a smooth(ish) economic transition, and their cooperation comes at a price. It's a careful balancing act.
Say NO to wealth taxes!
Just saying add property taxes sounds simple and easy, but it doesn't solve the issue and in fact exacerbates the issue.
To see why, we have to think a little beyond knee-jerk reactions and dissect what the problem & proposed solutions actually mean.
1. We don't want people to speculate on real estate
Speculation on real estate relies on property prices rising, this is by definition a capital gain. Property prices are assessed based on both the property and its surroundings. So capital gains may come from the driving the poor out of the neighborhood (gentrification) and/or improvements to the property.
The duration of time between purchase and sale does not impact the amount of capital gain!
For example, if house prices are rising 10% per year, someone who purchases a house at the beginning of the year and sells it at the end of the year each year for 10 years will have the same capital gain as the person who bought their house and held for 10 years before selling.
The only impact to speculators from duration of holds is their behavior towards "improvements to property". A low duration of hold incentivizes band-aid fixes and cover-ups to long-term problems. For example, if the duration hold is 1 year, the speculator is encouraged to caulk broken window welds (doesn't hold up) rather than replace them. Leaky A/Cs are left causing humidity/mold issues rather than replaced, etc. Mold issues are bleached / painted over rather than fixing problems in the building.
Speculators only make money when they sell the property. This is extremely important to understand.
Increases to ongoing/maintenance costs has no effects on speculators, because the time-axis doesn't concern them. Only restriction/taxes on the act of selling affects them.
2. We want people to only buy houses they live in
People who only buy houses they live in, do not benefit from any capital gain because they cannot sell unless they are moving. That means any rise in property prices cannot be realized aka unrealized capital gains. If people never move, capital gains will be effectively 0. The only real consideration is ongoing / maintenance costs.
Anything that increases ongoing / maintenance costs discourages buying houses to live in.
3. How property taxes play out in the real world
Property taxes are ongoing / maintenance costs. They accumulate on duration of hold and are assessed on property value.
This incentivizes speculators to squat on raw land / buildings in dire disrepair until surrounding property values rise, then quickly build and sell.
This happens in real life all the time. People/developers buy land / crappy buildings near where they think will be a future development like a large mall, a train station, a new school, etc. and just sit on it. With a minimal property value, they pay next to nothing in property taxes. Then once the desired development is completed and nearby property values skyrocket, they commence development on the property and sell. Suppose the original land/building value (2nd hand) was 8,000 RMB / sq m when bought. This is a price you can see on the outskirts of Shenzhen. The US has a property tax of ~1%. A newly built building with nearby ammenities could fetch 70,000+ RMB / sq m. So suppose a train station built nearby bumped that 8,000/sqm to 40,000/sqm (just 40k to account for age/reconstruction), how long before the property tax causes you to lose money on this deal? It's 500 years.
Let's suppose a property tax of 10%, so you lose money past 50 years.
I can charge 5000 RMB/month for a bare-bones 100 sq m house/flat. This 100 sq m flat at the 8,000 RMB/sqm level would only cost 80,000 RMB per year in 10% property tax, of which 60,000 RMB is covered by rent. Therefore I effectively only pay 20,000 RMB in property taxes or 2.5%. So even at a property tax of 10%, my "lose money" point is still 200 years. If property taxes are 20%, then the point is 40 years. If property taxes are 30% or even 40%, that point only drops to 22/15 years which is still nothing to speculators.
Suppose I'm a speculator with a holding period of 5 years and it takes 2 years to reconstruct the building. 10%, 20%, 30%, 40% property taxes means I will walk away with a net gain of 3.0, 2.6, 2.2, 1.8 million RMB after 5 years. Holding it for longer only slightly reduces gain. Since this earning isn't really time dependent, I am incentivized to do this as frequently as possible, aka pumping the real estate bubble as much as possible.
The running costs of 80k, 160k, 240k, 320k RMB/year (10/20/30/40%) basically don't matter to me. But notice how high the running costs are by themselves. If you only rely on salary, the ongoing costs are prohibitive. A house to live in, by definition, cannot be rented out. So a typical family whose salary is their only source of income is priced out. And for small-time landlords, who have at most 1-2 other buildings, the potential loss from just a few months without a tenant are too high to bear. So property taxes just forces people to rent, prices out lower/middle class, and leaves all the speculation money to the wealthy / large development consortiums.
Hong Kong literally has a property tax of 15% and that hasn't dampened rampant real estate speculation. In fact, it has one of the worst real estate bubbles in the world.
4. Capital gains is the thing that matters
Capital gains does not impact people who buy to live. They can never realize those gains anyways!
Capital gains impacts at point of sale, which is the only thing that matters to speculators.
Let's redo the calculations with a 20%, 40%, 60%, 80% capital gains tax. Without property taxes and just capital gains tax, I make 2.7, 2.1, 1.5, and 0.8 million RMB. Because of rent, I actually gain money the longer I hold it with the proportional value of that gain being greater the greater the capital gains. Notice this tax only happens on sale of the property and normal families are completely unaffected.
If I buy a house for 1 million RMB and the surrounding area appreciates, my taxes do not rise and force me to move. Gentrification is not forced to happen. With sufficiently high capital gains tax, the appreciation of property is no longer a source of wealth.
For example, at 80% capital gains on this 5 year property hold, my effective compound "interest" is 15%. Meanwhile a 40% property tax gives me a "compound interest" of 26%. In 2021, China reported a Y/Y profits increase of 12.2% for manufacture of electrical machinery + equipment. 38.9% of computer, communication, and other electronic equipment. You can see how even a 40% property tax is still somewhat attractive for "investment" while pricing out everyone but the ultra-rich. Capital gains doesn't affect the poor and makes it less attractive that investing in actual industry.
PS: Hong Kong is 0% capital gains tax. So real estate speculation is basically not taxed at all. China has a flat 20% capital gains tax for property.
To see why, we have to think a little beyond knee-jerk reactions and dissect what the problem & proposed solutions actually mean.
1. We don't want people to speculate on real estate
Speculation on real estate relies on property prices rising, this is by definition a capital gain. Property prices are assessed based on both the property and its surroundings. So capital gains may come from the driving the poor out of the neighborhood (gentrification) and/or improvements to the property.
The duration of time between purchase and sale does not impact the amount of capital gain!
For example, if house prices are rising 10% per year, someone who purchases a house at the beginning of the year and sells it at the end of the year each year for 10 years will have the same capital gain as the person who bought their house and held for 10 years before selling.
The only impact to speculators from duration of holds is their behavior towards "improvements to property". A low duration of hold incentivizes band-aid fixes and cover-ups to long-term problems. For example, if the duration hold is 1 year, the speculator is encouraged to caulk broken window welds (doesn't hold up) rather than replace them. Leaky A/Cs are left causing humidity/mold issues rather than replaced, etc. Mold issues are bleached / painted over rather than fixing problems in the building.
Speculators only make money when they sell the property. This is extremely important to understand.
Increases to ongoing/maintenance costs has no effects on speculators, because the time-axis doesn't concern them. Only restriction/taxes on the act of selling affects them.
2. We want people to only buy houses they live in
People who only buy houses they live in, do not benefit from any capital gain because they cannot sell unless they are moving. That means any rise in property prices cannot be realized aka unrealized capital gains. If people never move, capital gains will be effectively 0. The only real consideration is ongoing / maintenance costs.
Anything that increases ongoing / maintenance costs discourages buying houses to live in.
3. How property taxes play out in the real world
Property taxes are ongoing / maintenance costs. They accumulate on duration of hold and are assessed on property value.
This incentivizes speculators to squat on raw land / buildings in dire disrepair until surrounding property values rise, then quickly build and sell.
This happens in real life all the time. People/developers buy land / crappy buildings near where they think will be a future development like a large mall, a train station, a new school, etc. and just sit on it. With a minimal property value, they pay next to nothing in property taxes. Then once the desired development is completed and nearby property values skyrocket, they commence development on the property and sell. Suppose the original land/building value (2nd hand) was 8,000 RMB / sq m when bought. This is a price you can see on the outskirts of Shenzhen. The US has a property tax of ~1%. A newly built building with nearby ammenities could fetch 70,000+ RMB / sq m. So suppose a train station built nearby bumped that 8,000/sqm to 40,000/sqm (just 40k to account for age/reconstruction), how long before the property tax causes you to lose money on this deal? It's 500 years.
Let's suppose a property tax of 10%, so you lose money past 50 years.
I can charge 5000 RMB/month for a bare-bones 100 sq m house/flat. This 100 sq m flat at the 8,000 RMB/sqm level would only cost 80,000 RMB per year in 10% property tax, of which 60,000 RMB is covered by rent. Therefore I effectively only pay 20,000 RMB in property taxes or 2.5%. So even at a property tax of 10%, my "lose money" point is still 200 years. If property taxes are 20%, then the point is 40 years. If property taxes are 30% or even 40%, that point only drops to 22/15 years which is still nothing to speculators.
Suppose I'm a speculator with a holding period of 5 years and it takes 2 years to reconstruct the building. 10%, 20%, 30%, 40% property taxes means I will walk away with a net gain of 3.0, 2.6, 2.2, 1.8 million RMB after 5 years. Holding it for longer only slightly reduces gain. Since this earning isn't really time dependent, I am incentivized to do this as frequently as possible, aka pumping the real estate bubble as much as possible.
The running costs of 80k, 160k, 240k, 320k RMB/year (10/20/30/40%) basically don't matter to me. But notice how high the running costs are by themselves. If you only rely on salary, the ongoing costs are prohibitive. A house to live in, by definition, cannot be rented out. So a typical family whose salary is their only source of income is priced out. And for small-time landlords, who have at most 1-2 other buildings, the potential loss from just a few months without a tenant are too high to bear. So property taxes just forces people to rent, prices out lower/middle class, and leaves all the speculation money to the wealthy / large development consortiums.
Hong Kong literally has a property tax of 15% and that hasn't dampened rampant real estate speculation. In fact, it has one of the worst real estate bubbles in the world.
4. Capital gains is the thing that matters
Capital gains does not impact people who buy to live. They can never realize those gains anyways!
Capital gains impacts at point of sale, which is the only thing that matters to speculators.
Let's redo the calculations with a 20%, 40%, 60%, 80% capital gains tax. Without property taxes and just capital gains tax, I make 2.7, 2.1, 1.5, and 0.8 million RMB. Because of rent, I actually gain money the longer I hold it with the proportional value of that gain being greater the greater the capital gains. Notice this tax only happens on sale of the property and normal families are completely unaffected.
If I buy a house for 1 million RMB and the surrounding area appreciates, my taxes do not rise and force me to move. Gentrification is not forced to happen. With sufficiently high capital gains tax, the appreciation of property is no longer a source of wealth.
For example, at 80% capital gains on this 5 year property hold, my effective compound "interest" is 15%. Meanwhile a 40% property tax gives me a "compound interest" of 26%. In 2021, China reported a Y/Y profits increase of 12.2% for manufacture of electrical machinery + equipment. 38.9% of computer, communication, and other electronic equipment. You can see how even a 40% property tax is still somewhat attractive for "investment" while pricing out everyone but the ultra-rich. Capital gains doesn't affect the poor and makes it less attractive that investing in actual industry.
PS: Hong Kong is 0% capital gains tax. So real estate speculation is basically not taxed at all. China has a flat 20% capital gains tax for property.
I would maybe hike tariffs on large-engined ICE vehicles. Restrict exports on more rare earth but other than that I wouldn't do much more.
China has had no presence in the US solar market since Obama but now dominates the global industry in every step of the process.
Do not allow your foes anti-market moves make you anti-market. The West would love for China to go back to the insulated world of Mao. In fact, their actions is an attempt to isolate China economically. The best way to counteract that is to continue to be open and trade wherever you could.
The thing to remember is trade is a "great to have" but China's most powerful advantage is the largest market in the world for everything.
Look at the two industries that the West is attacking in China:
1) EVs, China has the largest EV and the largest car market by a factor of two over the next challenger,
2) Chips, China is basically 50% of the global market
Just dominating the home market is enough and the advantages by such a large and competitive market -- economy of scale, competition-fed innovations, etc -- will translate into advantages on the global market no matter the tariffs and bans.
And again, China is not South Korea -- exports are a nice supplement but the key to the economy is a market that buys in multiples of even the US.
China is a huge market but it needs other markets as well since its demographics are negative. By 2050, the West + India will have an almost 3:1 demographic advantage on China and the only counter is to cultivate other markets in the Global South. Robots don’t consume after all.
I don't buy the demographics narrative. For decades, having a huge fast-growing population was a negative for development not a positive.
This was proven out in the 1960s and 70s when China, India, Nigeria, etc. had these immensely "favorable" demographics.
In fact, in 1970, the fertity rate in China was 5.72(!!!) which rounds out to 6 kids per woman.
But China was piss-poor. As poor as India until its fertility rate began to reach first world standards.
The story of how a large growing young population is an advantage only changed in 2010s when China combined a high growth with a large population. Now it becomes a "good" thing because China was an exception.
If this young growing demographic advantage were real then Nigeria and every sub-Saharan country with that demographic advantage in the 1960s would be wealthier than Europe and Japan today, some 60 years after. Which we all know is not true.
The fact is low birth rate is a result of high development, high income and high GDP.
The only way for India to gain demographically on China in any significant way is to stay poor. If it becomes wealthy, it's birthrate would trend to same as China, Japan, Europe and the US.
A China of even 1B (losing 400M) at the GDP per capita of Shanghai nationwide would be many times the size of the GDP today. The markets will grow by factors not by percentages from today.
And China won't age away 400M in our lifetime.
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