Property Tax and Price-to-Rent Ratio in China: A Counterfactual Analysis

In the 19th National Congress of China, the central government proposed that instead of speculation houses are for living, and will construct long-term mechanism to stabilize housing prices. To achieve the national strategic target, the legislation of property tax in China has been speeding up. Shanghai and Chongqing, as two experimental cases, have implemented property tax system since Jan. 2011. From the literature review, the main research area is the effect of property tax on housing prices. On the one hand, the prices of houses fall by the present value because of the projected increase of holding costs, see e.g. Van den Noord(2005), Cebula(2009) and Kuang(2012). On the other hand, because of the improved local public services quality, the housing price will increase, see e.g. Oates(1969), Fischel(1992) and Lang and Jian(2004). However, housing prices do not fully represent the stability of housing market. price-to-rent ratios are commonly used by scholars to gauge the degree of speculation in the housing market. In the paper, we evaluate the effect of trial property taxes on housing price-to-rent ratio making use of a counterfactual analysis, exploiting the dependence of housing prices among different cities. We use the leave-nv-out cross-validation criterion for the optimal choice of the control cities, where property tax has not been implemented, and construct the counterfactual price-to-rent ratios in Shanghai and Chongqing by comparing with the control cities. The empirical result shows that property taxes have different effects on different types of houses. The result suggests that in order to curb the soaring housing prices, property tax is a ‘future-oriented’ policy. But it should be different in different cities, and different house type should be corresponding to different policy.