Cooling Hong Kong’s property bubble

Hong Kong moved to cool its property market last week by introducing new taxes to discourage speculators from the mainland.

John Tsang, the city’s financial secretary, told the media on Friday that the government would increase the stamp duty for sellers who flip their property within three years, as well as imposing an additional 15% stamp duty on all non-resident buyers.

The second measure is aimed at curbing speculative demand from mainland China, while the first is an extension of an existing policy to cool short-term speculation.

The proportion of new properties bought by non-local buyers has gone up from 5.7% in 2008, to 13.7% in 2010, and 19.5% in 2011.

In response, the government first introduced a special stamp duty in November 2010 that all but eliminated sales within one year of purchase. However, the number of transactions for resale between one and two years has increased from 83 cases in March this year to 218 cases in September, Tsang said, noting the possibility that rising property prices have weakened the “deterring effect” of the duty.

But what is driving the rise in prices? Besides mainlanders, the government points to two other causes: low interest rates and lack of supply.

“The US Federal Reserve has extended its pledge to maintain an exceptionally low interest rate at least until mid-2015,” said Tsang. “I am concerned this may extend the investment horizon of short-term speculative activities.”

But he said that the core problem was the lack of supply.

Of the three contributors to Hong Kong’s rising property prices, we asked our readers which they thought was the most significant. Most disagreed with Tsang and placed the blame on the Chinese, which likely reflects broad opinion in the city.

However, close to 40% of voters blamed ultra-low interest rates in the US, which Hong Kong imports through its peg to the dollar.

The government’s own figures show 250,000 vacant units in the city, suggesting that a lack of supply is in fact not the core problem. Indeed, so many empty apartments hints at another worrying possibility: that speculators are unwilling to rent out their properties at real market prices for fear of revealing the true yield.

With zero returns on offer at the bank, and precious little elsewhere, sitting on a vacant property that has appreciated 20% this year alone is hardly a painful decision to make. The problem for the government is that it is powerless to raise interest rates.

The measures announced on Friday came as a surprise and hurt the share prices of property developers on Monday, but are still unlikely to tilt the balance in favour of local first-time buyers.