BIZCHINA> Review & Analysis
Investment tax could rein in house prices
By Li Shi (China Daily)
Updated: 2006-02-17 10:06

Originally adopted by banks for new customers wishing to open accounts, the practice of proving one's identity using official documents has been widely applied in other situations.

But there are still many occasions when identification is required, though not necessarily one's own. Buying houses, train tickets and mobile phones may soon require proper proof of identity.

But such suggestions have sparked controversy. Many doubt the practice will be successfully introduced to the property market.

The Ministry of Construction will require proof of identity from this year, in an effort to prevent speculation and to stabilize house prices. This is in line with the Guideline issued by seven relevant central ministries last May that called for holding back the rising momentum of property prices.

National statistics indicate house prices are continuing to rise quickly. In Beijing, the growth rate was 19 per cent last year while that in Shenzhen was 17 per cent.

The ministry will require that the names on advance sale registration and final property rights certificates for a house are the same. Developers used to coin names for advance sales to mislead consumers by suggesting houses were selling out.

This technique creates panic among consumers, frightening them into buying and distorting prices. This trick is also employed to coax banks into lending, disrupting financial order.

If seriously implemented, the new identity requirement will definitely help stabilize house prices, although to what extent remains unknown.

Stock market speculators used to borrow ID cards from thousands of farmers and use them to open accounts and manipulate stock prices despite the so-called "real name system" supposedly being in place. This happened in the 1990s, so should serve as a fresh reminder for policy-makers that devising a similar system for the real estate market will be difficult.

To prevent the identity measure from being circumvented, policy-makers need to devise more detailed implementation approaches, including punishment for those that break the rule. A policy without explicit punitive measures is a toothless tiger.

Using real identities will help regulators track market transactions. But even if the policy is effectively carried out and prevents developers from playing dirty tricks, it cannot curb rocketing house prices in itself.

We must understand that no matter what is behind rising house prices whether it is government control of land supply, loose regulation or manipulation by developers, ultimately high prices must be realized through investment-oriented speculation.

Therefore, follow-up measures must be introduced to curb wild speculation, though one can use an ID card belonging to a friend or relative to speculate.

The banking and taxation authorities can play a significant role in curbing speculation. While the banks should be asked to restrict lending to those that are found to have been profiteering from real estate speculation, higher taxes should be levied on investment-based property transactions.

For families that already own one or two houses, high taxes should be imposed if they continue to buy property, which should be deemed an investment-based transaction. If bank loans are involved, the interest rate should be set substantially higher. Income tax should be levied if the house is sold at a premium in the following years.

The costs of house speculation should be set near or even higher than potential gains for speculators.

As a trial, a number of cities have levied a 20-per-cent income tax on individual transfer of houses in recent years. But most of them soon scrapped the policy.

Analysts point out it is departmental and local interests that have led to the end of the short-lived reform.

Indeed, the real estate sector has become a pillar industry in most regions, bolstering splendid gross domestic product growth, which in turn is a crucial leverage for the political careers of local officials.

Many local governments cannot afford to lose the financial support of a booming property market. Against this backdrop it is no surprise that the taxation measure was aborted.

The special tax on investment-oriented individual house transactions is by far the most effective measure available that could curb speculation and hold back rising prices.

It is more effective than the "real name system." We have no reason to dodge it if we really want to make houses affordable for everyone.

(For more biz stories, please visit Industries)