There are rumors that property tax may soon begin. I doubt that it would be this soon. But, I do believe that it will come. The reason is that the government wants the money.

Suddenly, there is consensus that the property market is back. The market began to falter last fall. It picked up in May and June this year. By July it seemed that everyone believed that the bubble was back.

The amazing thing is that this consensus is emerging even though the debate on the economy is on hard vs. soft landing, the stock market is making multiyear lows, the capital outflow is at 7% of GDP annual pace, and the sentiment on the economy is at a two decade low. How could the property market alone keep burning hot? This sounds ridiculous and is so. I believe that the market revival won't last through the summer. Soon people will pinch themselves for not selling their empty apartments during this summer opportunity. I believe that China has over 20 million unoccupied properties.

I anticipated such a dead cat bounce last year. To clarify my record on property market, I predicted that the market would begin to decline in 2012 and continue for many years with some dead cat bounces along the way. I began to voice concerns about a nationwide property bubble in 2006 and never said that the market was going to drop anytime soon. I wrote repeatedly to differentiate between talking about bubble and predicting the turning point. Two years ago, I was leaning towards 2013 to be the turning point. I changed my mind last year and predicted the market would begin to fall in 2012.

Before talking about the nationwide bubble, I talked about Shanghai's property bubble in 2004 and predicted the market would fal in six months in October 2004 on Phoenix TV. Shanghai market peaked in May 2005 and fell by around 40% by the end of 2006, which, of course, didn't show up in official statistics. The reason that I made the predication was that Shanghai market was dependent on dollar liquidity. The Fed was going to raise interest rate, which would prick the bubble. Shanghai began to recover in 2007, being part of the national trend, i.e., fueled by domestic liquidity like everywhere else.

Many people manufacture the perception that I was predicting the market declining for many years. This is totally wrong. Fortunately, all my predictions were written in published articles.

Most unusual economic behavior in China is driven by government pushing for revenue. Rising government revenue fuels its expansion, which increases pressure for raising more revenue to sustain itself. The issue on property tax always depends on if it increases or decreases total government revenue. When the property market is hot, land sales, property transaction taxes, and profit taxes on developers are big, accounting for over half of the revenues at many local governments. Introducing property tax could kill the golden goose in such a situation. The property tax comes when the bubble is gone and the hope for its comeback is gone.

The dead cat bounce in the past three months must have given many hope that the bubble is back. Hence, the relevant government agencies don't want to dampen the market sentiment by talking about property tax. Only when such hope is gone that the tax would be formally rolled out.

Last year, land sales were 6% of GDP and property sales in the primary market 15% of GDP. Property construction cost is roughly one fourth of the sales price. The rest eventually all go to government through taxes or land sales proceeds. Hence, the total government revenue from the sector is about 12% of GDP. Let's say that this number is down by two thirds after the bubble deflates. The other two thirds may be shifted to property tax. The stock of residential properties is probably worth 250% of GDP at current price. That implies property tax of 3.2%.

But, as the bubble deflates, the price declines, and the stock value may decline by one third to half. That would translate into higher property tax rate. The current property rental yield is about 3%. Introducing property tax would cause the price to decline further, requiring more increase in property tax to maintain revenue. Essentially, on the way down, it is a vicious cycle. To maintain government revenue, the necessary property tax rate could reach 7%.

Maximizing government revenue is the most important force in driving China's economic policies. This force is yet to burn itself out. The change comes only when push back from the society is powerful enough. Before this turning point the economy is unlikely to recover.

The drag on the Chinese economy is the inefficiencies in the spendings by governments and state-owned enterprises. Strong export growth in the past decade covered up such inefficiencies. As China has exhausted surplus labor and the western economies are in secular decline, the exports won't rise to cover up the inefficiencies anymore.

China's property bubble has been a tool for taxing the economy. While the bubble is deflating, the government's desire for money remains the same. It will try other ways like property tax to raise revenues, which further dampens the economy. The vicious cycle on the way down will only reach its logical conclusion when some force emerges to change government behavior.