Loosen Property Curbs? Not so fast

China’s real estate market is mired in a dilemma： The more the government tries to regulate the market， the more prices go up. This has led to an outcry among the general public.

A meeting held at the end of July by the Political Bureau of the CPC Central Committee， the country’s top decision maker， vowed to “promote the stable and healthy development of the real estate market.”This deviated from last year’s “strengthen the regulation of the real estate market and affordable housing construction，” triggering market speculation that regulations could be relaxed. The possibility of any relaxation， however， is slim.

Any relaxation in property curbs would lead to a huge rebound in home prices. Home prices climbed markedly during the first half of 2013， with surging land sales and record-high land-transferring fees， despite tightening property curbs. How can the government let loose such a red-hot market？

Worse still， there are simmering risks in the property sector， which has been a pillar of growth in the Chinese economy. Yu Yongding， a professor of the Chinese Academy of Social Sciences， said China， a country with per-capita income of only$5，000， shouldn’t have invested so many resources in real estate and shouldn’t have let the sector become an economic growth engine. After having visited many countries， Yu found the growth in China’s real estate market has surpassed that of any other country. A medium-sized city in Japan can hardly compete with a county in China in terms of property development. Property investment accounts for too high a proportion in total investment and in GDP.

According to Xinhua News Agency， the average home size is only 47 square meters in Hong Kong， a city with a per-capita income of $20，000 to $30，000. In sharp contrast， the average area of an affordable apartment is 90 square meters on the mainland.

In short， a severe misallocation of resources in the property sector is likely to ruin the national economy if the situation continues to exacerbate.

A long-term solution， such as a property tax， should be established to further regulate the property sector. This can lead to a transition from short-term solutions to long-term regulations.

Three elements should be taken into consideration when designing a property tax. First， the tax shouldn’t be seen as a source of regular fiscal revenue， but as a special tax to be put toward improving or maintaining the city or community environment. Second， community planning determines the total budget， and the total budget determines the property tax rate. Overall community planning should refer to last year’s fiscal revenue and expenditure. Government spending should depend on fiscal income and no fiscal deficit should be allowed. The next government should not shoulder the responsibilities of the previous one. Finally， while a community committee would have the power to levy the property tax， the whole process should be subject to supervision.

In the end， a reform on property tax is no easy task. Before the above-mentioned problems get sorted out and well-functioning policies are formulated， short-term administrative property curbs should not be loosened.