Impacts of Property Tax Levy on Housing Price and Rent: Theoretical Models and Simulation with Insights on the Timing of China Adopting the Property Tax

Abstract

What will be the impact of property tax levy (RPT) on China's housing price? The conclusions from existing research are conflicting, failing to pinpoint how RPT will affect housing price and rent. More crucially, theoretical economic models are missing in clearly describing the operating mechanisms of the tax's impact. Starting with a theoretical model of RPT, housing price and rent, the paper derives the path and mechanism of RPT affecting housing price and rent, and provides insights on the choice of timing for China to adopt and levy RPT. Our simulation results show that under China's circumstances, if the effective RPT rate is 0.5% and the RPT revenue is not used to increase public services, the tax may cause a housing price decline between 8.3% and 12.5%. If the RPT revenue is used for basic public services, the housing price decline will be as small as 1.7% to 2.5%, but rent may rise by 6.7% to 20%. The reason for the sharp drop in housing price is the bubble; the premise of a rent hike is that the public services that renters can benefit from are substantially improved. Based on the impact of RPT on housing price fluctuation, the period after the market has gradually squeezed out the housing price bubble may be among the best windows for adopting RPT.