No sector exposes China’s pragmatism as thoroughly as the country’s property market, as evidenced by the reaction to the government’s recent measures to cool the housing market.
In the week after China announced a 20% capital gains tax on the sale of second properties, divorce rates sky-rocketed as couples — particularly those living in tier-one cities — sought to dodge the property tax through sham separations.
Registry officers who were used to only a few cases a day were soon seeing as many as 50 couples daily, according to local media. The couples seeking to dissolve their marriages reportedly looked very happy and intimate — and some admitted publicly that the break-up was merely a separation of convenience.
In addition to the capital gains tax, the stricter-than-expected regulation also increases mortgage rates and down payments aggressively on second-home buyers.
The policies were felt strongest in China’s well-off cities, where it is common among middle-class families to own more than one apartment as a way of preserving wealth. Households usually keep one for their own use and one as an investment.
However, if a married couple separate and each party owns one of the properties, the tax doesn’t apply. If the property is only under one name, the other person can purchase again as a first-time buyer.
Sadly, the mentality in China now is such that almost any cost-saving is seen as worth exploiting. Thus, avoiding the capital gains tax seems reasonable because of the financial savings.
“It’s a 20% tax we are talking about; it helps us save so much money,” gushed one blogger. “Filing for divorce is cheap [the equivalent of about $1.50], while the properties lock up all of our savings,” said another.
One considerate blogger said: “Please be reminded to get married again once the transaction is completed.”
Beijing announced the new curbs last week before the National People’s Congress, in a bid, seen by analysts at HSBC, to deliver an important message that excessive exuberance will not be tolerated. The bank said the capital gains tax is a moot point, because this could freeze up transaction volumes and not necessarily weaken prices.
Although the policies are designed to make housing more affordable to first-time home buyers, a large number of people will now qualify to be the “first-time” buyers after divorce.
But will the new regulations have any effect at all? HSBC said the guidelines don’t reveal any significant divergence from what the equity market had already anticipated. Housing policy in China is still largely anchored by the Home Purchase Restriction.
Fitch predicts the rules will further polarise homebuilders. The rules will disproportionately affect smaller players with lower margins, with projects targeting speculative buyers or with a high concentration in cities that are targeted for stricter enforcement.
Bigger nationwide players, for instance China Overseas Land & Investment and China Vanke, will likely be less affected given their broad project mix, wide geographical coverage and high margins. The two developers have comfortable headroom at their rating levels, the rating agency said.
