Heading for a property tax?

While such measures have been effective in dampening house price growth, China's housing market will still have an underlying propensity for rapid growth and hence rising prices. With inflation running at over 5 percent (see Chart 3) and a bank deposit rate of around half that, Chinese consumers are faced with a negative real interest rate that incentivizes them to buy assets rather than lose money by depositing their cash in the bank.

The quest for a more systematic remedy for China's hot housing market has come to focus on a property tax, talk of which has been around for months now. The city governments of Chongqing and Shanghai have requested the Central Government to allow the imposition of such a tax in their cities, and speculation is mounting that existing real estate and urban land-use taxes may be integrated into a single real estate tax. If implemented on a trial basis in Shanghai and Chongqing, the new real estate tax may be rolled out nationwide sometime in 2011.

The outlook for China's property market thus remains uncertain, and the government's ability to control rapid price growth is still going to be severely tested in 2011 and 2012. Yet they will in all likelihood be able to keep the situation broadly under control, with a new real estate tax in tow.