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Chongqing’s income tax rebate for home buyers – “stop” or “go”?

Reportedly, officials of the Chongqing municipal government are making clarifications with the central government.  So far our information shows that the measure has not been put on board for implementation.

The offering of income tax rebate to home buyers is considered to be a more aggressive supporting measure to boost housing demand.  Shanghai had put on board similar measures during 1999-2003 in the aftermath of the Asian financial turmoil.  

The market generally expects that Chongqing will set a precedent for other cities to follow suit, should the property market continue to fall.

While clarification on the central government's policy intent is awaited, the "go" or "stop" scenarios will carry different implications on the central government's policy intent:

The "go" scenario:

The central government continues to allow local governments to have discretion in using fiscal measures to support the property market.  Supportive
policy measures will be on a more customised basis according to the need of different cities rather than a "blanket" approach by the central government.

But the local governments have to balance the boosting effect on home purchase against the consequential loss in fiscal revenue which would put pressure on public resources to boost domestic demand.  In Chongqing, the boosting effect is not expected to be significant, given the lower income of residents and hence their tax savings.

The "stop" scenario:

The central government wants to avoid the floodgate that other cities will follow suit.  This would undermine fiscal position of the local governments particularly those poorer provinces / cities which eventually have to resort to fiscal support by the central government.

With a more market-oriented approach in economic adjustments, the central government tries to avoid "heavy-handed" measures to support the property market.  Reasons:

– The government tends to fine-tune the market to smoothen out volatility but.a heavy-handed approach would create market distortion, leaving undesirable consequence of even sharper fall back in property prices when the measures are withdrawn.

– The current property market adjustment is deemed acceptable to the extent that together with the mortgage rate cut, affordability of home buyers has indeed improved a lot.  In the light of the uncertain extermal environment, the central government wants to reserve ammunition for future use to cope with further deterioration of the property market resulting from unanticipated events.