On the evening of November 13, the Ministry of Finance, the State Taxation Administration, and the Ministry of Housing and Urban-Rural Development jointly issued an announcement regarding tax policies to promote the stable and healthy development of the real estate market. This announcement clarified several tax incentives aimed at supporting the housing market. The recent effort to reduce transaction tax burdens on the demand side and development tax burdens on the supply side represents the most significant targeted tax reduction in recent years.
Historical Context
Since September 29, when first-tier cities were granted the autonomy to adjust housing purchase policies in response to market conditions, effective actions have been taken to implement existing policies and enhance new measures. On October 17, five departments, including the Ministry of Housing and Urban-Rural Development and the People’s Bank of China, launched a policy “package” aimed at stabilizing the real estate market, which included “four cancellations, four reductions, and two increases.” On November 8, the Standing Committee of the National People’s Congress announced an increase of 10 trillion yuan in local debt resources.
The recent announcement of substantial tax reductions by the Ministry of Finance is aligned with the overarching goal of stabilizing the housing market, aiming to create positive effects of “reducing costs, lowering thresholds, and enhancing expectations,” thereby sustaining the activity levels in the commodity housing market since October. Recent market data shows that transaction volumes in key cities remain high. For example, according to CRIC Shenzhen, new home online contract signings in Shenzhen increased by 7.3% week-on-week from November 4 to November 10, and secondary housing transactions have exceeded 2,000 units weekly for five consecutive weeks. However, it may be challenging to maintain such high levels of actual subscriptions moving forward, highlighting the declining marginal effects of these policies. Therefore, it is essential to form a synergy and cycle between implementing existing policies and introducing new ones to solidify transaction activity in the commodity housing market and promote a quick stabilization of the real estate market.
Key Features of the Tax Reduction Policies
- Reducing the Burden of Purchasing Large Housing Units:
- This aligns with the evolving housing demand from merely “availability” to “quality,” reflecting a shift in consumer preferences.
- Greater Tax Reductions for First-Tier Cities:
- This is mainly due to significant population inflows and early real estate development in these cities, leading to a concentration of demand for both first-time buyers and those seeking improvements in their living conditions. The new policies are expected to facilitate transaction circulation.
- Simultaneous Tax Reductions on Demand and Supply Sides:
- This is the first time adjustments have been made to the land value increment tax for developers in recent years. The primary reason for this is the notable improvement in sales, with transactions in hot cities experiencing over 50% growth since October for both new and second-hand homes. However, this positive trend has not yet translated into the development and land markets, with some plots in hot cities being withdrawn or sold at reserve prices. Meanwhile, the decline in new housing starts has not shown significant signs of abating, with a cumulative drop of over 20% from January to October, indicating that developers are still focused on destocking, reducing leverage, and ensuring project completions. Thus, the tax reductions on the supply side aim to encourage developers to initiate construction and acquire land more actively.
Additional Considerations
Besides a 0.5 percentage point reduction in the lower limit of the land value increment tax pre-collection rate, local governments can adjust the actual pre-collection rates based on local conditions. This means that the 1% to 1.5% land value increment tax rates in eastern and central regions may be further reduced or even eliminated, with taxation possibly postponed to the project delivery settlement stage. Additionally, ordinary standard residential projects with sales value increments not exceeding 20% of deductible project amounts will be exempt from land value increment tax. The removal of the distinction between ordinary and non-ordinary residential properties significantly increases the tax reduction on the supply side.
The adjustments in the tax burdens during housing transactions are set against a backdrop of significant changes in the housing supply-demand relationship. During periods of tight housing supply or when availability is a primary concern, it is necessary to maximize housing supply while moderating consumption of large units through a differentiated policy framework, including varied deed tax and value-added tax policies. Now, as we enter a phase of rising improvement demand, the necessity for these measures has diminished.
Moreover, to curb the development of non-standard residential projects by property firms, it is essential to shift towards lowering tax costs for land development at the front end and reducing the burden of supporting infrastructure construction transferred to local governments, thereby boosting developers’ enthusiasm for self-initiated projects. Overall, as the era of incremental growth transitions into one focused on existing stock, the previous tax system aimed at curbing rapid development and price escalation needs to shift towards reducing development and transaction costs, promoting transaction cycles, and placing greater emphasis on the funding needs for existing housing and community support services. Thus, a comprehensive review of the real estate tax chain reveals a clear trend toward tax reductions in transaction processes.