Real Estate Sales Taxes Fall YoY in April; More Than 30 Cities Consider Loosening Housing Policies; Threat to Development Model

Real estate sales tax collections fell 4.2% yoy in April, a sharp drop compared to the 5.5% yoy gain in March. Real estate companies income taxes also fell 3.1% yoy. At the national level though, real estate taxes are only 2% of government revenues. Tax revenue was up strongly year on year overall. Real estate is a major source of local government revenues though, and in a bid to increase turnover (and increase those sales tax collections), more than 30 cities are looking at loosening housing policies.

Small local government real estate taxes such as deed tax, land VAT, farmland use tax, city land use tax, etc. increased by 1.2%, 24%, 3.2% and 16.9% respectively, down sharply from last year's 20% to 30% increases. These tax declines aren't a big issue in terms of revenue, but they are a bad sign for local governments that rely on land sales. The article below cites land sales as accounting for 25% of local government revenue, but in some cases this figure is far higher.

In response, more than 10 cities are working on plans to ease buying restrictions, according to incomplete research from a "China Business" reporter. More than 30 cities are looking at various easing plans. Tianjin is looking at allowing buyers to own a third home. In Tianjin, land finance accounts for more than 60% of government revenues, putting it ahead of cities such as Xiaoshan and Ninbgo in Zhejiang province, both of which have loosened housing policy. Provinces that rely on land finance for more than 50% of revenues include Tianjin, Zhejiang, Chongqing, Beijing, Hainan and Fujian.

Land use right transfers (land sales) raised 1.08 trillion yuan in revenue during the first quarter of 2014, an increase of 40% yoy, versus local revenue of 1.95 trillion yuan. The ratio of land sales to public finances at the local level is about 1:1.7, or well over one-third.

An example is Hangzhou. In 2013, the Hangzhou government was the most reliant on land sales in all of China. In January, Hangzhou earned 40 billion from land use right transfers, equivalent to 25% of all of 2013. In February, sales were 9 billion, a more than 70% drop from January. In March, sales were 3.8 billion, a 60% drop from February.

China International Finance Limited, chief economist Peng Wensheng sees three effects from weak land sales. The first is reduced local government investment, reduced fixed asset investment. [There's your economic rebalancing away from investment.] The second is increased debt risk for local governments. The third is restrained credit growth. Peng also makes the important point that real estate price decline expectations are still forming. As I've pointed out here in previous posts, the situation was worse from a price standpoint in 2011. Peng goes on to note that developers haven't started to reduce land purchases yet, but that could be coming in the next few months, in which case land revenue growth for many cities will decline and even turn negative.

To recap the situation: Chinese local governments sell land to developers who build homes and commercial centers. The revenue from land sales pays for development of supporting infrastructure, everything from roads and subways to schools and parks. Land sales also finance local government debt which exploded after 2008. In the post-2008 economy, developers rushed to build property amidst a real estate bubble and when the government moved to restrict activity in first- and second-tier cities, developers poured into third- and fourth-tier cities and repeated the model. However, developers have run ahead of many local governments. In areas where there are true ghost cities, support infrastructure such as schools and hospitals have not been built. If the real estate bubble bursts and land sales fall, local governments will need to find another revenue source or they may be unable to finance the infrastructure that generates GDP growth and supports the local real estate market, and they may even face a debt crisis in some of the worst hit areas. This ignores all the potential issues with indebted developers, plus overproduction and bad debts in other sectors of the economy.

As it stands today, the GDP slowdown doesn't even reflect a breakdown in this model. All we have seen thus far is cracks in the real estate market and some problems in the hardest hit areas such as Hangzhou. This is why the central government isn't planning a stimulus and won't even consider one until things turn for the worse. Near the end of the second article below, one professor speculates that if the market hasn't recovered by July or August, the government should consider a rescue. However, the policy choices are increasingly limited due to existing debt levels.

In the early 2000s, financial repression was covered up by high growth rates in real GDP. There was a real cost to bailing out the banks, but it was a fraction of the gains made during the decade. This time around, the costs of a rescue or bailout are going to be much clearer. The post-2008 credit bubble has created a tremendous amount of malinvestment and the bill is coming due. In the end, what a rescue will be is a cost shifting exercise. The government can take steps to redirect the fallout, but they will not avoid it.

Slowing housing market hits local govt revenues

Business tax from the property sector amounted to 44.3 billion yuan ($7.09 billion) in April, down 4.2 percent year-on-year and corporate income tax of property firms was 24.8 billion yuan, down 3.1 percent compared with the same period in 2013.

In comparison, business tax and corporate income tax from the property sector saw a year-on-year increase of 33.6 percent and 25.1 percent in 2013. The growth rate eased to 10.3 percent and 11.7 percent in the first quarter.

Tax revenue from the property sector contributed to nearly 30 percent of local government income in 2013, according to a report from Shanghai-based E-house China R&D Institute in February.

超30城有放松调控预期 十余城市传松绑限购

May 12, the Treasury announced revenue and expenditure in April, which, by the recent real estate sales decline affected the real estate business tax 44.3 billion yuan, down 4.2% compared to 5.5% growth in March dropped significantly.

Compared with the sales tax, VAT, income tax accounted for more than half of the three, as the property tax on all real estate taxes in tax accounting is not large, less than 2%, but the associated downstream industries brought on taxes accounted for ratio has reached about 10%, is a major source of local revenue.

April, the national real estate enterprise income 24.8 billion yuan, down 3.1%. Deed tax, land tax, farmland occupation tax, urban land use tax and other local taxes grew respectively by 1.2% smaller, 24%, 3.2% and 16.9%, an increase of two percent over last year at every turn also dropped significantly.

Decline in real estate tax increase for local governments, not just tax revenue, but also increased the land finance future income concerns. In this context, since April, more than the city of Nanning, Foshan and other buyers have came untied " restriction "policy is not hard to understand. As of May 16, "China Business" reporter to incomplete statistics, has reported "restriction order" to relax the city up to 10 or more.

"Such revenue decline, for a four-tier cities and second tier cities and the impact of the intensity is not the same as compared to first-tier cities, the overall four-tier cities in oversupply, the price may appear first or price change phenomenon. "Shanghai E-House researcher Yan Yuejin said.

There are over 30 cities expected to relax

For local government, real estate taxes shrink, perhaps not just as simple as reducing taxes, local governments rely more important mode of threatened land finance.

Local government revenues mainly include three: general budget revenue, the central and local transfer payments, income from government funds. Among them, the local government fund revenue primarily from land sales, land revenue since 2007 the proportion of total local government revenue increased rapidly in 2013 accounted for about a quarter of local government revenue.

Centaline Research Department statistics show that as of now, rumors have been brewing bailout of more than 10 cities, including certain adjustments have been made ​​to the existing six cities. Including Fuzhou, Hangzhou and other cities came second and third bailout rumors.

The latest rumor is Tianjin will release third suite purchase limit. The China Economic Research Institute said in a "23 provinces (municipalities) Land fiscal dependence" ranking statistics show that the financial dependence of land in Tianjin and Zhejiang Province, more than 60%, after Xiaoshan, Zhejiang Province, Ningbo also has reported the property market deregulation news.

The above statistics rankings, financial dependence on the land more than 50% of provinces including Zhejiang, Tianjin, Fujian, Hainan, Chongqing and Beijing.

"Cool the property market, leading to the gradual emergence of local fiscal issues, in this case, release the part of local government regulation has become the most commonly used measures to stimulate the economy, but also the most obvious short-term effects of the measures." Centaline Dawei, chief market analyst think.

A quarterly data released by the Ministry of Finance showed that the "land finance" hero status in the local government fiscal revenue is still strong.

The first quarter of the state-owned land use right transfer income reached 1.08 trillion yuan, up 40.3%, while the local fiscal revenue 1.95 trillion yuan, the proportion of 'land' income and local public revenue amounted to 1:1.7.

To relax the restriction came Hangzhou, for example, in 2013 the land was 156.4% financial dependence, 45 in the country to monitor the property market with the purchase of policy advice, the city's dependence on land finance ranked first. After entering 2014, Hangzhou land market appeared "weak after the first strong" trend. In January, Hangzhou sell 35 land, the land premium reached 33.956 billion yuan, accounting for 25.6% last year. But in February, the month in Hangzhou city's land transactions in the total amount of 9.2 billion yuan, down 72.8 percent. Into March, the city's only eight land, the total turnover of approximately 3.8 billion yuan, up and ring data are likely to drop sharply, the total turnover shrink four percent from the previous month.

China International Finance Limited, chief economist Peng Wensheng had published an article that the financial downturn has brought pressure on the land to local governments, will have an impact in three areas: First, reduce local government investment, the impact of investment in fixed assets; second is to increase local government debt risk; third is not conducive to credit expansion. Macroeconomic tightening effect will bring a whole. Land revenue decline brought pressure on local governments.

"In the case of the real estate market continues to cool, the country is expected to have more than 30 cities have expectations and the possibility of relaxing regulation. Follow, including prices close to stagnation of the city, there may be introduced where the bailout policies, they may not be obvious to relax purchase, but will be fine-tuned by other means. "Dawei analysis.

In this context, Peng Wensheng said that the current slowdown in real estate sales, the impact of cash flow has begun to reflect, but the real estate price expectations are still being formed. Inhibition of real estate investment sales decline and land acquisition is not yet fully reflected, land revenue growth is expected in the coming months will decline, and negative growth.

Or take the lead in the four-tier cities "occupied"

From the national market, the structural differences resulting decline in real estate tax increase is still relatively large.

Centaline data show that 35 cities in the country, there are 28 cities in inventory grew phenomenon appeared. Which Nanchang, Jinan and Ningbo three cities a greater increase in inventory, an increase of 68.6%, respectively, 63.8% and 56.8%. These three cities in April new supply deal stronger than, the stocks upward trend is also obvious.

"The common feature of these cities are: inventory digestion period exceeding one year the city; sharp drop in real estate transactions in the first quarter of the city; purchase to sales ratio is too high city; land premium is too low in the first quarter of the city; has substantial real estate prices city; net population outflow from the city; There are two more new area of ​​the city, "said Zhang Dawei.

"From the level of development in the local property market and weight watching, a second-tier cities for a relatively low degree of reliance on the real estate industry, and for the four-tier cities, the property market downturn will lead to smoother city funding cycle." Yan Yuejin said.

Data analysis with policy advice, said the purchase of the city from outside the first-tier cities, the dependence on land finance more than 50% of total 31 cities, which suggests that most capital cities, and some four-tier cities are still the land of financial dependence relatively high. Macroeconomic fundamentals, especially not good for the city in terms of its financial dependence on the land more prominent, such as city, Zhejiang Province, Hangzhou, Ningbo, Wenzhou and other.

"Four-tier cities, because of lack of local labor, slow import foreign population, the market demand is difficult to support because of the large number of new town development and soaring stocks." Yan Yuejin said.

In stock reaches a certain extent, the price seems to be an unexpected choice.

Professor at the Central University of Finance and Economics temperature come into view, although the real estate tax revenue, but there is no point to save the city, ability to tier cities has slowed down compared to before, but a short time, if you continue to seven January is still not turning, the government should be considered bailout.

Right now, housing prices destocking measures are becoming increasingly visible.


Sino-Ocean Land, president of Li believes that 2014 is more important for the ocean is to increase turnover. Accelerate the pace of sales, especially to accelerate the speed of inventory, which is to improve the turnover rate of the main path. Sales over the ocean to obtain a license for a year called slow-moving inventory, three months or more is called the continued sales, less than three months is called new.

After taking a series of measures over the current three-year offshore stocks is almost zero, more than two years of strong clean out, reducing the company's poor sales pressure.

In this context, housing prices on the four-tier cities are cautious to enter.

"The future of the city to enter requires three conditions: First, many people choose the city; Second, the urban economy is sustainable development, or that it's innate natural environment to attract new population movements; three cities ever Planning stability. "Li said.