How to make two problems worse with just one policy

Higher taxes for homebuyers will merely make property prices even more unaffordable, while adding to the government's unused cash pile

PUBLISHED : Monday, 25 February, 2013, 12:00am
UPDATED : Wednesday, 27 February, 2013, 9:36am


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Anyone who has followed the headlines in Hong Kong over the last few weeks will know two things: one, homes in the city are blisteringly expensive; and two, the Hong Kong government has money coming out of its ears.

First: the property market. Home prices have doubled in the last four years. As a result, a typical Hong Kong family would have to save every cent it earned for 14 years in order to pay for a typical flat in the city.

Even the minimum downpayment on a mortgage would eat up four full years of household income. It's no wonder people are protesting.

Second: government finances. When he stands up to deliver his budget speech on Wednesday, financial secretary John Tsang is expected to announce a budget surplus for the current fiscal year that, by the time all the numbers are in, is likely to top HK$50 billion.

Added to the spare cash squirrelled away in the Exchange Fund, that will bring the government's accumulated reserves to almost HK$1.4 trillion, or 70 per cent of the city's gross domestic product.

Confronted by these two problems - unaffordable properties and a super-abundance of government cash - last week the financial secretary came out with an idea that in one stroke manages to make them both worse.

On Friday Tsang announced he was jacking up the stamp duty on home purchases, making properties even less affordable for would-be buyers, while raising even more un-needed revenue for a government that's already rolling in excess funds.

Under the new measures, the stamp duty on a flat selling at the current median price of around HK$4 million doubles to HK$357,000.

Granted, first-time buyers are exempt from the increase, but even so it stretches the mind to imagine how hitting the buyers and sellers of flats with higher taxes will do anything to make homes more affordable.

For those who already own flats, upgrading to a larger home will become even more prohibitive. That means fewer people will be inclined to sell. Transaction volumes will plunge. But in a sellers' market, greater scarcity will be more likely to drive prices up further rather than to bring them down.

Tsang attempted to justify his increase in stamp duty, saying it was needed to contain a market bubble. "If we allow the bubble to grow, in the end it will affect the macroeconomy and also the stability of the financial system."

His reasoning is dodgy. The biggest impact rising property prices have on the rest of the economy is through their effect on inflation.

With housing costs the biggest single component of the consumer price index shopping basket at a weight of 29 per cent, any painful increase in rents should soon make itself felt through higher inflation.

But as the first chart shows, Hong Kong's inflation rate is actually declining. At just 3.1 per cent in January consumer inflation (stripping out government relief measures) was at its lowest in two years.

Thus it seems the macro-economic impact of high home prices is surprisingly muted.

The threat that climbing property prices pose to Hong Kong's financial system has also been exaggerated.

The second chart shows the value of outstanding mortgages relative to all bank loans, as well as to the Hong Kong banking system's total assets. Over the last 10 years mortgages have declined from 28 per cent of banks' lending to just 16 per cent, and from 9 per cent of banks' total assets to 6 per cent.

Considering the majority of borrowers who have taken out mortgages over the last two years own 50 per cent or more of the equity in their homes, the danger of a market correction triggering a surge in bad loans big enough to hole bank balance sheets looks negligible.

In a nutshell: by jacking up stamp duty, Tsang has managed to exacerbate both of the two big problems he faces without doing anyone any good at all.