Beware the unintended consequences of property-cooling measures

Shirley Yuen says move to target speculators is also unfairly penalising the business community

PUBLISHED : Monday, 12 May, 2014, 6:48pm
UPDATED : Tuesday, 13 May, 2014, 1:29am

John Mauldin, a US financial expert, wrote recently about the annual Darwin Awards, given out "to honour fools who kill themselves accidentally and remove themselves from the human gene pool".

"The 2009 award went to two bank robbers," he wrote in a weekly economics e-letter. "The robbers figured they would use dynamite to get into a bank. They packed large quantities of dynamite by the ATM machine at a bank in Dinant, Belgium. Unhappy with merely putting dynamite in the ATM, they pumped lots of gas through the letterbox to make the explosion bigger. And then they detonated the explosives.

"Unfortunately for them, they were standing right next to the bank. The entire bank was blown to pieces. When police arrived, they found one robber with severe injuries. They took him to the hospital, but he died quickly. After they searched through the rubble, they found his accomplice.

"It reminds you a bit of the immortal line from the film, The Italian Job where robbers led by Sir Michael Caine, after totally demolishing a van in a spectacular explosion, shouted at them, 'You're only supposed to blow the bloody doors off!'"

Mauldin used the story to illustrate how central bankers, in their attempts to reflate the economy, got more than they bargained for in the process.

In Hong Kong, recent policy mandates introduced by the government in the name of cooling the red-hot property market could have the sort of unintended consequences that would undermine our ability to compete more effectively. Instead of just taming unwanted market gyrations (or only blowing off the doors), we risk losing our hard-earned reputation as a laissez-faire economy (blowing up the entire bank and ourselves with it).

Make no mistake, the administration's resolve to act decisively to combat market exuberance and suppress speculation is applaudable. After all, homeownership is a common aspiration among Hongkongers and the quantum-like leaps in property prices in a short space of time simply do not sit well with such goals.

Through its "'shock and awe" tactics of rolling out a series of stamp duties - the special stamp duty in 2010, the buyer's stamp duty in 2012 and then a doubling of stamp duty last year - the government has shown it means business in confronting a market fuelled by historically low interest rates, excess liquidity and keen interest from across the border. According to the government, the introduction of the special and buyer's stamp duties were extraordinary measures needed to address exceptional circumstances in the market to ensure its healthy and stable development, which was crucial to the sustainable development of Hong Kong as a whole. They were also intended to safeguard permanent residents' interests.

As expatriates and the international business community struggled with the implications of a sea change in what was Hong Kong's long-standing attitude of providing a level playing field for all, the government heaped further controversy on its market-cooling measures by introducing a double stamp duty applicable to both residential and non-residential properties.

It is difficult to understand the rationale behind the government's decision to include the non-residential market. If it is to bring down the cost of doing business through the moderation of what it perceives to be unreasonably high prices, the outcome would be the opposite of what is intended. The doubling of stamp duty actually adds to the cost of doing business in two ways: first, by pushing those who wish to buy but are deterred by these taxes into the rental market, thereby increasing rental demand and thus raising the cost of operations; second, over the longer term, by raising both rentals and purchase costs from landlords trying to recover their acquisition outlays.

Although the sweeping application of this duty is, ostensibly, to stem the possibility of speculative capital being redirected away from residential to non-residential premises, this however has the undesirable knock-on effect of also penalising corporate owner-occupiers and long-term investors.

It is perhaps instructive to note that, in Singapore, where stamp duty on the sale of industrial property was introduced last year to curb short-term speculation, the authorities there adopted a regressive approach very similar to the design of Hong Kong's special stamp duty - a 15 per cent seller's stamp duty is levied if an industrial property is sold within the first year; 10 per cent if sold in the second year; 5 per cent in the third; and no duty beyond that.

Although the business community, including small and medium-sized enterprises, would rather that the double stamp duty was amended to exclude non-residential real estate, the Singapore approach may offer a viable alternative to achieve the government's objective of stamping out short-term speculation while addressing the needs of genuine owner-occupiers and long-term investors.

Shirley Yuen is CEO of the Hong Kong General Chamber of Commerce