• Mon
  • Dec 29, 2014
  • Updated: 2:14pm
PUBLISHED : Tuesday, 30 October, 2012, 12:00am
UPDATED : Wednesday, 31 October, 2012, 7:17am

Taxing foreign buyers failed in Singapore. It will fail in Hong Kong too

The government's new punitive measure on the property market will have an effect – it will lead to the demise of the city as a financial centre

Yesterday, this column argued that the Hong Kong government's punitive tax on non-residents who buy apartments in the city will do nothing to make the property market more affordable for locals.

Judging from the messages that cascaded into my e-mail inbox, the majority of readers disagree - vehemently.

So, in response to all the feedback, I'm going to amend my view. The government's punitive tax on non-resident buyers will do nothing to make the market more affordable for locals in the near term. In the long run, its effects will be wholly negative.

First, let's dispense with the notion, espoused by several readers as well as the government, that increasing the special stamp duty on property owners who sell within three years of buying will deter speculators and so bring down prices.

As Cusson Leung and Joyce Kwok at Credit Suisse pointed out in a research note published yesterday, raising special stamp duty rates will only backfire. Experience shows that sellers will just try to pass the extra cost on to buyers by demanding higher prices in compensation.

Next, let's dispense with the idea that shutting mainlanders out of the local market with a punitive tax, which Monitor's readers clearly regard as an excellent move, will make flats any more affordable for locals.

The first chart below shows the estimated proportion of mainland buyers in Hong Kong's primary and secondary markets.

(Incidentally, these estimates are based on subjective judgments of whether the buyer's name looks like a mainlander's and so tend to overstate the number of non-residents in the market.)

As you can see, the proportion of mainland buyers has fallen over the past year. Yet as the second chart shows, prices have continued to surge, climbing more than 10 per cent over the same period.

One reader, who wrote in support of the new measures, unwittingly illustrated the reason why.

She is understandably aggrieved at having to pay HK$10,000 a month in rent for a 395 square foot flat in Sha Tin, because with similar flats now selling for HK$2.8 million, she cannot afford to buy.

Lots of people can, however. If you have the minimum down payment of HK$840,000, it makes compelling sense to buy a HK$2.8 million apartment, taking out a 25-year mortgage for HK$1.96 million to cover the rest of the asking price.

With mortgages available at interest rates of 3 per cent or less, your monthly repayments will be just HK$9,290.

As a result, your rental income of HK$10,000 a month will not only cover your mortgage repayments, it will give you HK$710 in spare cash. That's five times what you would have earned in interest had you stuck your HK$840,000 in a 12-month fixed deposit.

Naturally enough, lots of Hong Kongers with cash in hand have done the same calculation and are buying flats. Some are even remortgaging their own apartments and using the proceeds to buy more flats. As a result, prices are rising.

Slapping a punitive tax on non-resident buyers won't change things. If you don't believe that, just look at Singapore, which imposed its own additional stamp duty on foreign and corporate buyers in December last year.

Transaction volumes fell initially, but then recovered. Prices have continued to rise. Earlier this month, a bungalow on Sentosa island sold for a record S$3,214 per square foot. That's equivalent to an eye-popping HK$20,398 a square foot.

In the long run, however, the government's new tax will have indeed an effect. By selectively penalising non-residents, it broadcasts the message that Hong Kong is no longer open equally to all comers and so hammers a first nail in the coffin of the city as an international financial centre.



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This article is now closed to comments

Whether imposing a sanction in the way of punitive taxes on foreign property purchasers is violating the principles of laissez-faire is irrelevant,remember the US barred Chinese technological company Huawei's trading ?No where in this world would have a complete free market.The point is bona fide profit-oriented foreign property investors consider capital gains and look for greener pastures,tax rate is also irrelevant.
Tom, you might reflect on some major causes of the present property bubble: Donald Tsang's and Henry Tang's administration colluding with the property tycoons. Government restricted the supply of land, did not build flats, cancelled the Home Ownership Scheme, obliterated the meagre rights tenants had in 2004, and mainlanders smuggling vast sums of illegally laundered cash into Hong Kong to invest in the "dark walls." and keeping them empty, in effect handing the keys of the treasure house to the property developers, almost none of whom ever earned the money they inherited and who don't give a fig for lesser folk who do an honest day's work for a living.
Where in the reasonably honest places in the world can property developers build for a maximum $2,000 per sq foot and sell for $12,000 to $15,000? Where a buyer cannot even get a freehold title this must be the worst value for money in the world. Presumably, you have some constructive suggestions on how to enable Hong Kong people to afford a home and to stop the crooked manipulation of the market?
It must be conceded that Tom has written a very rational and judiciously argued opinion. But rather than helping the lady who finds the current housing price too exorbitant, Tom is telling her, "Correct! It's not for you, and the likes of you who makes less than $15,000/month!" Is this the HK to be looked forward to, a society with a gulf separating the haves and have-nots.
With 3 bowls of rice and 5 people wanting them, I don't see how taxing policies could alleviate the problems. Taxing only helps the govt from making more money and accumulating huge reserves from the people of HK and get them even poorer !
In 1997 there was also 3 bowl of rice for 5 people but the property collapsed if u still remember. If u and tom is right, how about taxing 100%, will that work? Assuming they hold it for 3 yrs, taxing 100% will implies the price has to increase 100% to break even! Will this work? Every investor will calculate the cost and the expected profit to invest.
First, Tom and the bank analyst, you all look at what happens in Singapore but you forgot about that was last year that the price was say 20 to 30% cheaper but not is 20 to 30% more expensive plus another 15% extra. We heard all these analyst keep telling us HS will be 45,000 or oil will exceed $200 before the 2008 crash. But were they right? My point is where the price point is does matter.
Second, I have to reiterate again interest low interest rate is not the only major reason for the surge but is "expectation" of hK people. I recently unloaded a property as a renter was convinced by realtor that mortgage is cheaper tha rent. That argument will reverse as interest rate a lady rock bottom plus naturally if prices kept going up. There is a point where people just can't afford it or there is almost very little upside for capital gain.
Third, I have friends keep telling me very soon Tin Sui Wai will be selling 10k per sq ft and I heard similar argument on radio that price can only go up as contruction cost can only goes up and now is already 4k per sq ft. But did anyone know wages actually has been flat as new grads are making much less money than us 10 20 yrs ago. If Tin Sui Wai is selling at 10k, who much will be a bowl of won ton noodle? If HK is still an export or service hub, that cost will kill us and back to square one naturally...
To continue sorry for typo above hope u get the points. Still also say one more point, the sentiment pre 1997 HK crash and 2006 USA crash is exactly the same people and analysts are predicting ever going up prices. 1997 crash was a result of bubble built up triggered by Asian crisis and the 85k is only a trigger point. You may argue now the borrowing is much lower then that time but don't forget we are at historically low int rate. Plus once sentiment changed it will be different totally once people expect the price to drop. History already taught us in the .com age, 1997, US and Europe bubble etc...what's goes up must come down....Newton law ...
One more point sorry, last year Singapore only impose 10%. If I was an investor last year I expect price will up say 30% so i will still make about 15% after costs. But now in HK price already up 20 to 30% and we put in 15 % extra tax, how about Tsang increase this to 30% extra? Will Tom and these analyst still coming out to predict it won't work? Unless you predict the price will increase 100% in less than 2 otherwise as an investor the upside will not be justified.
If Tom and these analysts put their money in their mouth and put up a housing future index, I will short it for sure, no brainer.
Wow. another article just to validate a previous opinion.
By itself, the new taxes are likely not enough, can still close the Capital Entrant Migrant scheme loophole Jake mentions in his "supporting" commentary among other measures.
Highly doubt the international community is going to perceive the taxes as "hey, I'm not wanted here, let's move to Singapore" but rightly so as a temporary measure to limit property bubble before interest rates rise (and they will). Tom talks like the math works out to continue to buy property now even with a 25 years FLOATING rate mortgage. So please buy now.
Read an interesting John Maudlin article recently as follows:
"But economics is different from accounting. Economics makes assumptions in almost all of the models it uses, and those assumptions come with biases. Common sense trumps mathematical models, every time."
Common sense tells me property prices are way over people's earning levels and affordability in HK.
I'm sort of global trader. Buy on rumor sell on fact. Interest rate has only one direction. up. All priced in. So what's prediction for house price in HK? Plus HK is the most expensive place already but only 10% are families are making 40k a month, and min wages is only $28. Every going up price will kill our competitiveness and reduce consumer spending. Forget about these wealth effects as renters has no money to spend and mortgagee either. Won ton noodle will be $50 a bowl so you tell me what will happen? Newton Law as I like Apple....
My considerable respect for Tom Holland has dropped several levels after reading this article, with its numerous errors on the economics of the housing market.
1) The proportion of mainland buyers in the market is not a very good metric of their influence on prices. With little short-term elasticity in the supply of homes, adding a small number of buyers at the margin can have a major impact on prices.
2) Your analysis of your reader's financial situation is wholly unconvincing. First, while the monthly mortgage payments may currently be affordable to your reader, they are unlikely to be so for the duration of a 25 year mortgage given interest rates will eventually rise from current lows. Second, you are ignoring the various costs which owners must pay that tenants do not, such as management fees and maintenance. Third, HK property is a risky and volatile asset and comparing the returns to a fixed bank deposit is wholly inappropriate.
3) Is there any evidence at all to suggest that HK's success as a financial center has anything to do with the fact that non-residents could buy property here?
Tom Holland has quite clearly not taken the trouble to check his facts.
Foreigners now make up only 7% of the market, compared to 20% before Singapore introduced those measures.
Another difference is that between 85-90% of locals own their property, compared to half in HK.
So HK has to do much more to more housing more affordable to its people
nice biyatch slap in the face of mass ignorance!
there is nothing more to say. Tom Holland nailed it!
Time to bring back the rent control legislation which Bow-tie shortsightedly dismantled to help his developer friends. This time , however, commercial property should also be included.
This levels the playing field for resident and non-residents but at the same stalls the excesses of raw-market greed.
If speculative real-estate is all that HK is good at for a "international commerce centre" then I think there's a much bigger problem. But having seen how financial institutions actually work, I think you are totally off-base and incorrect.
This discourages foreigners from moving to the territory, period - many from abroad relocating would sooner buy locally. It seems misguided since most price escalation is due to buyers that meet the residency criteria, not those that don't. Perhaps this is more to appease the typical anti-mainland HongKongers and gain their support for government. Maybe HK doesn't need any expatriates from USA, Europe or elsewhere.
Indeed, Hong Kong does not need low, stimulative interest rates. Note also that mortgages in Hong Kong are all floating rate : humans have a consistent propensity of underestimating risks; its likely that nobody considers the mortgage burden if rates normalize to a few percentage points higher.


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