China Power

Divorce: One Way to Avoid China’s New Real Estate Restrictions

Recent Features

China Power

Divorce: One Way to Avoid China’s New Real Estate Restrictions

“Shanghai’s Zhabei District center issued a record 53 divorces in a single day.”

There are many reasons couples divorce: money, extra-marital affairs, boredom, etc.  In China, it’s a strategic decision: divorce is one of the key ways Chinese citizens can evade new real estate restrictions. 

In March, I discussed new property laws that had just come in effect in China. Among the new changes: a 20 percent tax on the profits from selling a second home in Beijing and Shanghai and increased down payments and mortgage rates (an increase in a downpayment on second homes from 60 percent to 70 percent in Beijing, for example). In Shanghai, banks are forbidden from loaning money for third homes, and in Beijing, single individuals can only purchase one home. Cities in Zhejiang, Jiangsu, and Guangdong provinces have increased minimum borrowing requirements and capped the size of housing loans from local housing provident funds.

These regulations were put into place to address still-rising property prices. In March, prices rose in 68 out of 70 cities, compared to the previous month, according to the National Bureau of Statistics. Citing figures from the China Real Estate Index System, the Wall Street Journal notes that average prices in 100 cities rose 3.9 percent in March (year-on-year), the fourth straight month of rising numbers, exceeding February’s 2.5 percent gain and January’s 1.2 percent increase.

As it is with any government restrictions, citizens have been anxious to find workarounds to avoid taxes, purchase additional homes, and otherwise evade the new regulations.

The divorce loophole recieved a lot of media attention earlier this spring: couples who own two homes and want to sell one were opting to divorce rather than pay taxes on the sale of their second home (after divorcing they were considered two individuals who each owned one home).

In early March, marriage registration centers were overwhelmed with couples filing for an uncontested divorce, which costs just a few yuan.  Reuters reported that Shanghai’s Zhabei District center issued a record 53 divorces in a single day. Divorce also allows an individual to transfer home ownership to their ex-spouse, and purchase a home as a first-time buyer, which often comes with incentives.

China Youth Daily noted that in the Tianjin municipality, 1,255 couples filed for divorce from March 4 to 8, an increase of 470 percent from the previous week. On the flip side, Xinhua speculates that the Beijing ban on purchasing more than one home may lead to fake marriages, to allow one individual to purchase a second home. Peking University professor Xia Xueluan notes, “the ‘fake’ divorces and marriages reveal design defects and loopholes in the country’s property control policies.”

The 20 percent tax on profits from a home sale has an easy out: it is based on the original purchase price, which is sometimes not available. In the past, if the price was not known, (or was alleged to be unknown) a (much lower) tax of 1-3 percent was instead levied on the sale value.

Corruption is a more direct way of avoiding real estate restrictions.  In February, the House Sister (real name, Gong Aiai) was arrested for corruption after having acquired 41 homes in Beijing alone, and at least 4 others in other localities. Gong evaded rules by (allegedly) forging official identity papers.  House Brother, Zhang Xiuting, is accused of having bought 19 properties.  The New York Times notes that these cases often involve officials who use “multiple identity cards and household residence permits (hukous)” to evade housing restrictions.

It’s unclear how the government plans to address the use of these loopholes. Recently, Shanghai said that it would make it harder for divorced people to buy homes, though it didn’t elucidate how that would be carried out. There are plans to introduce a unified national property registration system by the end of 2014 which would close some loopholes and allow for the implementation of an annual property tax, according to the New York Times.  This would be a crucial change, as one of the main issues is the vastness of China and the lack of unified records. Incidents like that of the House Sister will be dealt with harshly, both to dissuade others from that type of corruption and also to placate the outraged public.

These solutions, however, are not sufficient: the real problem with the efficacy of property restrictions is that there are inherent structural disincentives at many levels. A basic overview: first, banks have much to gain from continued property sales, as they make substantial profits issuing loans. Second, local governments make huge profits from land sales, and taxation reforms in the early 1990s have made local governments starved for revenue and responsible for a huge chunk of social services. So reining in the property market will take more than closing loopholes–at the very least, it will take changing local government incentives.