The real estate user charge and its impact on housing development in China

Abstract

Off-budget public finance in China is an informal system of levies that emerges in response to local fiscal needs. Off-budget funds serve as part of local government revenue and help finance local government expenditures. In the real estate sector, local governments raise off-budget funds by charging many types of user fees on housing development. The user charge revenue is an important revenue source to finance urban public service expenditures. Some drawbacks of user charges such as legal ambiguity and the lack of transparency reflect noteworthy investment risks in Chinese housing development. Thus, a good understanding of the real estate user charges is critical for foreign and domestic developers who are interested in housing development in China. In this study, we have explored literatures about urban public service policies, presented facts about the current user charge practices, analyzed the costs incurred in use fee transactions, evaluated the efficiency and equity contributions of the current system, and illustrated important issues in details by a case study of a single user fee.

(cont.) Based on our research, we argue that user charges are important financial instruments for urban public services such as water, gas, electricity, and sewage, whereas the current market is bearing a lot of transaction costs due to the incomplete legislation and the limitation of institutional settings. We recommend short-term and long-term strategies for future user charge reforms. Policy designed for improving the user charge system should be based on the particular circumstances in China. Reforms should proceed according to the evolution of the entire institutional environment and are expected to be gradual.