Want to gauge housing demand in China?...Watch the divorce rate
- The higher the tax-dodge divorce rate, the higher demand for property
- Loophole sees 'extraordinary surge' in divorced couples remarrying each other
- Government must think again to revive flagging property market
By Pauline Loong
Forget standard indicators such as price-to-income ratios. A more accurate gauge of urban residential property demand in China these days is the rate of divorce – or more accurately, divorce aimed at dodging property taxes.
The rule of thumb is: the higher the tax-dodge divorce rate, the stronger the speculative demand. The lower the divorce rate, the weaker the demand. What makes a divorce a tax-dodge move, as opposed to a genuine split, is the couple’s speedy re-marriage - to each other - after the relevant transactions have been completed.
And the latest tax-dodge divorce data show that the government has been so successful in squashing demand that it will take more than minor tweaks going forward to revive the now moribund market as new home sales and prices continue to fall.
Local statistics show an abnormally high rate of re-unions among divorced couples, which the authorities attribute to the widespread phenomenon of tax-dodge divorces.
In Shanghai, twice as many divorced couples remarried each other in 2014 compared with two years previously before fiscal changes made splitting up an easy way to avoid property taxes.
But in the affluent city of Nanjing, the numbers remain high. Nearly 25,000 divorced couples retied the knot in 2014. These reunions account for almost a third of marriages in the city that year.
Two years ago, the government raised capital gains tax on the sale of second homes to 20%. The move was aimed at clamping down on rampant speculation in the property market at the time and bringing what was then skyrocketing house prices back down to earth.
But, as always with attempts by Beijing to legislate away market forces, the unintended happened. The move unleashed panic. Prices jumped further and sales spiked as buyers and sellers sought to close deals before the new tax goes into effect.
Beijing has been quietly stepping up its easing campaign to jump start a slowing economy weighed down by a cooling property market, high debt levels and excess factory capacity.
But March data show few signs of stabilisation in the economy. Surveys of China's factory and services sectors showed continuing weakness in the economy with producer prices in factories falling again in March for 13 months in a row and companies shedding jobs as they struggle with weak demand.
The official Purchasing Managers' Index edged up to 50.1 in March from February's 49.9 or barely above the 50-point level that separates an expansion in activity from a contraction.
More worrying for the government is the stubborn weakness in the property sector, which accounts for an estimated 20% of GDP and 30% of total investment. Land sales alone account for 57% of local fiscal revenue last year.
But there are no signs of cheer for the moribund industry. Sales of new homes slumped 17% in the first two months of this year from a year earlier and investment in new housing dropped 1.8%. Prices fell in 66 major cities in February.
But given the importance of the property sector to the wider economy and to local government revenues, more aggressive tactics targeting the property market are more likely to be next in line.
Pauline Loong is managing director of Asia-analytica Research and senior fellow of the CIMB ASEAN Research Institute