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February 02, 2007

Beijing Pops a Housing Bubble. Now Housing Prices Will Surely Rise.

posted by MR WAVETHEORY at 2/02/2007 10:19:00 PM
A stock market bubble, a housing bubble, a stock market crash, a housing crash? In an effort to cool down the housing market, Beijing has issued an edict to restrict foreign ownership of housing to those who have lived in Beijing for one year for work or study. It applies not only to foreigners but also residents of Hong Kong and Macau who move the Beijing. For the lucky few who bought multiple houses before the edict, it will mean big profits.

By restricting ownership by foreigners, my take is that this will only ensure a rise in the price of housing. After all, it's all about scarcity value. Those foreigners who got in early are exempt from the rules and those who didn't get in ... well, they missed the boat big time. It's all about supply and demand. Cut off supply, keep demand the same, and you have rising prices. Simple economics. Even the economic planners in Beijing should know that you can't stop foreign ownership of housing. You can't stop a bubble from developing. You can only slow it down.

The communist government began allowing Chinese families to buy homes in the 1990s, and later let foreigners buy real estate. The government still officially owns all land in China, but buyers of apartments and houses receive deeds valid for up to 70 years.

Housing prices have risen 20% in the past year. The truth is that housing is rising because the cost of living is rising, the economy is growing, and people are getting wealthier. It's the wealth effect in full force and shows just how much of a market economy China has become. The planners should be happy that their is working!

China Daily printed the new value added tax rates on real estate appreciation.

According to the January 16 government notice, the VAT, which has been suspended for more than a decade, took effect on Thursday.

Property developers will have to pay 30 to 60 percent of their net gains as VAT. The tax will depend on the net profit from the sale of a property.

If the value-added rate is below 50 percent the tax will be 30 percent.

If the value-added rate is between 50 and 100 percent, 40 percent will be levied.

If the value-added rate is between 100 and 200 percent, 50 percent will be levied.

If the value-added rate is more than 200 percent, 60 percent will be levied.

The VAT will be collected when a single project is completed or transferred, according to the notice.

You have to love their reason for the tax: "excessive profits."

Excessive profit margins are said to be one factor behind the country's soaring housing prices.

SAT issued a notice shortly after the announcement that the tax is aimed at readjusting the profits of property developers and would not burden buyers.

"Though housing prices are decided by the market's supply-demand and have no direct link with the cost of development, the value-added rates would eventually affect supply and demand, and buoy prices," said Dong Fan, director of the property research center of Beijing Normal University.

Do you really think curbing supply will reduce the price of housing? Come one people. Go back to Econ 101, the part on macroeconomics. Remember the lesson where they talk about the effects of taxes on wealth? Taxes are a direct transfer of value from private ownership to public ownership that directly raise the price of housing for consumers while reducing the price paid to producers. The percentage of value extracted by taxes is a direct economic loss to both consumers and producers. By sticking this huge tax bill on producers and consumers, the government is just making the housing problem worse for consumers. Producers are not dumb. Producers will just raise prices to make up for the economic loss and consumers will just end up paying higher prices. I give two thumbs up to Beijing for raising the price of property even further. Thank you for continuing to support ever increasing real estate prices.

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