Why rich mainlanders benefit from a gov’t property tax policy which made small flat prices skyrocket

In simple terms, the Hong Kong government’s meddling in the property market hasn’t delivered for low income earners

PUBLISHED : Wednesday, 09 December, 2015, 9:51pm
UPDATED : Monday, 30 May, 2016, 2:05pm

[Chief executive Leung Chun-ying] said Hong Kong’s housing shortage was caused by inadequate land supply and “external speculation and investment demand.”

The stamp duty measures had been helpful in curbing demand and the government would not ease them, he said.

—SCMP, December 9

That’s right, push the blame elsewhere. The problem with the property market is that we have too little land, which is God’s fault, and too much speculation by mainlanders, whom C.Y. dare not call mainlanders lest Beijing complain. He thus calls them “external”.

We shall leave God out of it, except to say that God has given us plenty of land. But if the government insists on wasting it with Disney Parks, Cyberports and vast land-hungry road transport projects to prop up a declining container port, then the object of blame lies no further than the closest mirror.

We shall also leave the ... ahem ... externals out of this as the record indicates that they, too, are not to blame.

READ MORE: The home truth: we suck at maths, and we don’t need that many flats in Hong Kong

The chart tells the story. The red line along the bottom represents the Rating and Valuation Department’s price index for flats with a floor area of 160 square metres or more, the luxury end of the market in other words.

I have based it here to a value of 100 for March, 2010, just before introduction of the first of the punitive stamp duties that the government adopted to discourage speculation and cool down the market.

The measures seem to have worked in this segment of the market. Home prices over the last three years in particular have risen by a compound annual rate of only 2 per cent, which is less than the overall consumer price index.

I actually think, however, that this dramatic slowdown was as much the result of the government eliminating property from qualifying investments for mainlanders moving to Hong Kong under the Capital Investment Entrance Scheme.

A rough extrapolation suggests that this change alone deprived this part of the market of at least HK$72 billion of investment that might permanently have moved into it over the last three years.

But never mind all the contributing reasons for this slowdown. The fact is that the luxury end of the market is where the ... ahem ... externals invest their money in Hong Kong property and it is a thoroughly cooled down market at the moment. There is no question of blame here. There is none to attach.

And now look at the blue line in the chart. It represents the price index for flats of less than 40 square metres. Prices in this segment of the market have gone ballistic, far more than doubling since punitive stamp duties were introduced, seemingly untroubled by them in the slightest.

Now don’t tell me that it is the routine practice of the... ahem ... externals to go poking around housing blocks in the New Territories, looking for odd shoebox flats to buy and flip. This is a Hong Kong market driven by Hong Kong people, mostly for direct occupancy.

The true story is quite simple. Low interest rates constitute by far the single biggest force driving up our home prices and punitive stamp duties have no influence on them at all.

What we have done with these stamp duties is clear the speculative interest out of the luxury end of the market, where external ownership is prominent, while letting low interest rates divert all the froth into the purely local low-income segment.

We have achieved the exact opposite of what we intended, hitting Hong Kong working people with a double whammy of high prices and insulting special taxes, while alleviating the stress on rich outsiders.

Well done, Mr Leung.