As far back as 2011, Jonathan Anderson, a leading emerging-markets analyst, described China’s real estate industry as “the single most important sector in the entire global economy”. Although a highly questionable assertion, his point was that property and construction were at the core of China’s growth model, providing a vital source of demand for commodities, labour and debt. Fast forward a decade and the footprint of China’s property sector has grown even further. It represents a staggering 29 per cent of the nation’s GDP when all property-related activities are included, according to an academic paper published last year by Kenneth Rogoff and Yuanchen Yang. According to the authors, the degree to which the economy is dependent on real estate is unprecedented. China is more reliant on property than Ireland and Spain were in the run-up to the 2008 global financial crisis, and it is far more dependent than the United States was at the peak of its housing boom in 2005. Prices in leading cities in China have risen more than sixfold since 2002, pushing up the ratio of average home values to earnings in Beijing and Shanghai to more than twice the level in London and New York. Moreover, housing has become a highly speculative asset, with 87 per cent of new homebuyers already having more than one dwelling. An annual tax on residential properties – which has been in the works for almost 20 years but has been stymied partly by opposition from vested interests – would help deter speculation, bringing down prices. It would also provide local governments with a steady source of revenue, weaning them off their reliance on selling and leasing land to developers. President Xi Jinping’s “ common prosperity ” drive is partly aimed at reining in the excesses of the housing market. This has provided fresh impetus to the roll-out of the levy, prompting a decision last month to extend property tax trials to new cities. Yet, no sooner was it clear that there was a renewed push to implement the tax than a flurry of warnings about the dangers and untimeliness of the reforms emerged. Most of the resistance stems from fears that a wider experimentation with the tax would exacerbate the downturn in the housing market, dealing a severe blow to an economy that is already slowing sharply . In a sign of the extent of the concerns over the economic costs of the tax, an earlier proposal to expand the pilot schemes to 30 cities was whittled down to just 10. Shanghai, Chongqing show how buyers ignored China’s property tax Real estate taxes the world over are unpopular and riddled with conflicting objectives. In China, however, the real risk is that the long-delayed taxation of home ownership ends up falling short of what is needed to address the underlying problems of the sector. First, the damage to sentiment is already done. Beijing crossed the Rubicon when it committed itself to taking the heat out of the property market. House prices are declining in China’s largest cities on a month-on-month basis for the first time since 2015 , while home sales are falling sharply. Although the prospect of the tax is weighing on sentiment, any revenue from the levy will not be collected for some time. In the interim, the government has plenty of tools at its disposal to ease pressure on the sector and buy it time to design and implement the tax. Second, earlier trials in Shanghai and Chongqing provide a warning of the consequences of ill-conceived reforms. The levies, which were introduced in 2011, failed to restrain prices, mainly because there were too many exemptions. A report by Fitch Ratings on November 2 noted that the taxes in both cities have generated revenues amounting to less than 7 per cent of the income derived from land sales. Any significant extension of the trials must find a way to break local governments’ chronic reliance on land sales . In Chongqing, sales of land-use rights accounted for as much as 36 per cent of the government’s revenue last year, according to Fitch data. Third, property taxes are notoriously difficult to implement in any country. However, nowhere is the challenge more acute than in China, where more than 70 per cent of households’ wealth is tied up in property, compared with 35 per cent in the US, according to Bloomberg data. Not only must the justification for rolling out the tax be clear to homeowners, the levy must be efficient, equitable and transparent. This is a tall order at a time when China’s property sector and the wider economy are under severe strain . Yilin Hou, a professor of public administration and international affairs at Syracuse University, said there was a “window of opportunity” for a well-designed tax and that the key was to ensure it is “doable and enforceable”. This window is closing. The question is whether Beijing can hold its nerve and be as bold a reformer in property taxation as it has been in clamping down on leverage in the sector. The worst outcome would be to push ahead with a poorly designed levy that ends up leaving local governments’ finances in a more precarious position. China’s economy is paying the price for having put off implementing a nationwide property tax. The danger now is not that an expansion of the pilot schemes precipitates a market crash but that proper reform is once again impeded. Nicholas Spiro is a partner at Lauressa Advisory