This annoucement just released on Nov. 26 and I don’t find any English version of the news until now. So I just attach the Chinese version and summerize some information as below:
http://finance.ifeng.com/money/wealth/consume/20091126/1511732.shtml
The Administration paid attention to a gradually frequent phenomenon in the renting market that many renters re-rent their apartments to the third party and earn income from the differential renting prices. And this decision is proposed specifically to regulate the taxation of those who re-rent their renting apartments.
The information in the news is a little bit difficult for me to translate into English, so I have already sent this link to Professor Xie and hopefully he can lead the talk next week for details.
Minxiao
This measure would disincentivize overly low rental rates from the landlord to an colluded intemediary for sub-leasing at market rates in evasion of the levy on rate differentials.
In Hong Kong, sub-leasing is prohibited in standard contracts, and if so allowed, prior approval from the landlord is needed. Hence, Hong Kong has no problem with tax evasion through sub-leasing, and every leasing transaction has to be put into the official record of the Land Registry (for protection of landlord interests, notably the legality of estate retrieval in case of prolonged delinquency) so evasion is technically improbable. If an apartment is to be divided into several sections for independent leasing, this would typically be done by the landlord directly rather than through an intermediary.
Basically, aside from tax evasion, I see no reason for the existence of an intermediary, if so colluded, to conduct sub-leasing business. Now that rates differential is to be taxed, I would envisage a rational landlord to take charge of all levels of leasing and division works, if any.
Articulated by Sunny Choi
This proposal is to ensure fair subleasing levels. I don’t know if I necessarily agree as I believe that letting the market should set rent levels without penalization. In parts of Europe it’s common with subleasing limits, i.e. you can only charge, let’s say, 30% over your total rental costs (excluding mortgage payments!!). The purpose is to allow also low- and middle income earners access to living in downtown areas.
This issue again illustrates that China’s rules and regulations are not in well organized and well order. I know that nowadays in China, re-renting is forbidded by all renting contracts under supervision of brokers (which is the majority of renting). So, dose the govenment mean that they are going to treat such kind of “illegal” or defaulting behaviors as legal? Or are they going to guarantee tenants’ right of re-renting, for if ther are still underground, how can government collect such tax?
Additionally, in my oppinion, I am happy to see the opening of re-renting, because it will be a little helpful in stimulating the rental market by activating the transaction and velocity of circulation of usage of housing, and will be helpful in controling the housing price.
Karthik from Unclemilton:
Minxiao and Sunny: Am I correct in my understanding below?
Currently the Chinese government has some regulations and landlords have to rent houses at low prices for the benefit of poor people. But these landlords rent it out to their partners, who in turn rent out the apartments at a much higher market price. Thus the landlords are indirectly able to evade renting it out at low prices. Taxing the second rent income will close this anamoly/gap.
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Hi Karthik,
I am sorry to reply you a little bit later, since I have one project due very soon. Ok, the government in China does not require the landlords to rent their apartments at a very low price. Actually according to my information, the renting market in China is perfect competitive and the price is market set. However, the significant problem is that this market is not well developed and there are very few laws or regulations to make it work efficiently.
Hence, renters can sometimes re-rent the apartment to others without letting the landlord know or sometimes with the permission of the landlord. Just like what Dike has said, I think government does not want to forbid this kind of transaction but would like to use taxation to regulate it, which in my opinion is a good tool to let the market decide itself. According to the annoucement which I did not translate fully, the cost of renting the apartment does not include in the tax base. That is to say, if one rents a house by 1000 Yuan a month, then he re-rent it out by 1500 Yuan, he just needs to pay the tax of the 500 part, if I do not misunderstand the news.
Minxiao
I agree with you Dike, opening up the market for sub-leasing creates transparency and dynamics in the market place and surely helps to control housing prices.
/Erik
If, as we discussed in the class, the underdeveloped rental market is one reason for highly priced housing, would it be a good policy to exempt all rental and sublet income from taxation?
I think it might be an incentive for people to rent out the house/apt if exempting all rental and sublet income from taxation, however, a well enforced regulation is more preferred to protect the right for both landlords and tenants in the rental market.
In NY, the rental regulation is very protective to tenants and some landlords would be very hestitated to offer their spare housing to market as they are too busy to take care of details such as maintenance. If through agnecy, there will be extra cost too.
On a separate question to Dike, why China forbidding the sub-leasing??
Winston
I saw some reports about the phenomena of re-renting affordable housing in Guangzhou. The government concerns that the re-renting will hit the system of protective housing. Also, re-renting may include some speculative behaviors. Maybe that could explain the government’s forbidding, to some extent.
But I still remember, in almost every classical microeconomics textbook, there is an illustration on house-renting market to introduce the basic ideas of demand, supply and free market. With different reservation prices of tenants and supply of landlords, a free market has its own mechanism to get equilibrium and efficiency. So I think it is reasonable to exempt some imposed taxation or some other governmental interventions. Also it is good for further development of the market. (Maybe actually, the government’s policies always make more confusion and mess than regulation, which cause less trust on them… )
However, government still has responsibility to ensure fairness that the free market cannot work out.
That is quite abstract and ideal perspective, compared to the complicated and confusing facts,but maybe it is the basic and common sense we could hold.
chenhui
Here is an article about Japan’s property market bubble: http://www.nuwireinvestor.com/articles/the-state-of-japans-real-estate-market-53959.aspx
Interestingly, Japan now tries to improve incentives for housing rental.
Answere To Winston’ question:
China’s Government dose not forbid re-leasing. The law say: “the tenant can not re-lease the house without permitment from the landlord”. But in China, usually, when you want to rent a house, you will go to an agency. If you find the one you want and the landlord also want to rent it to you, you two should sign a contract provided by the agency. Those contacts are in a same template. The things diffrerent are only your names and the house’s name. In these contract, there is always one item : “the tenant is forbidden to release the house to others”.
You know why? That is because the agency dose not want to bother itself. Whenever there is dissension between tenant and landlord, the agency is involved. So the agency just simply forbid it to prevent any dissension.
I think this principle cannot work out well in China. So far as I know, although the re-renting the house is somewhat illegal in housing market, there are lots of ways to evade such policies. For example, for commercial housing, if one wants to re-rent its place, he can signs a cooperation contract with the tenant, but in fact it is a lease contract. Therefore, it is still a law and enforcement problem in essence, which is not applicable in nowadays China, in my view.
Jiayin