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  • Dec 21, 2014
  • Updated: 9:08am

15 per cent stamp duty

To rein in the city's runaway housing prices, Hong Kong's Financial Secretary John Tsang Chun-wah announced an additional 15 per cent stamp duty on non-permanent-resident and corporate buyers starting from October 27, 2012. The move prompted speculation over the effectiveness of taxation on the real estate market and criticisms that Hong Kong was turning away from its roots as a free market economy in favour of a more protectionist market environment.


CommentInsight & Opinion

Government must back off to keep Hong Kong a truly free market

Lam Pun-Lee esays Hong Kong's standing as a free market is being undermined by its own government, with its intrusive restrictions on property and other sectors that hurt growth

PUBLISHED : Tuesday, 04 February, 2014, 11:14am
UPDATED : Wednesday, 05 February, 2014, 4:13am

Hong Kong's economy has always been a global stand-out, rated the world's freest for 20 consecutive years in a ranking compiled by the US-based Heritage Foundation and The Wall Street Journal. However, with a drop in the score for corruption and increasing government control over land policies as well as factors limiting the flow of information, the gap to the others - notably Singapore - has narrowed further.

This trend is worrisome.

A case in point is the property market. In the decade following the 1997 handover, Hong Kong's property market experienced unprecedented volatility due to some obvious political factors in a government-policy-driven market.

Hong Kong is a densely populated city, where land supply is controlled by the government. Land supply influences the supply of housing and property prices, which means that the real estate market cannot be considered a truly free market. Furthermore, the Monetary Authority can exercise influence over bank mortgage policies, significantly affecting transaction volumes and pricing.

After the handover, housing measures implemented by then chief executive Tung Chee-hwa failed to resolve the effects of the Asian financial crisis. Tung's pledge to provide 85,000 flats each year caused the market to crash. His subsequent bailout in 2002 through a restriction on land and property supply then drove prices up; since 2003, they have more than tripled.

After Donald Tsang Yam-kuen took over in 2005, no land reserves were established. This left the government with insufficient land to meet market demand, causing prices to climb further since 2009.

Given the short-term housing supply shortage, the government could only rely on demand management measures and the tightening of mortgage rules to suppress demand. While initial policies were aimed at reducing speculation and the sale of luxury housing, the tightening of mortgage rules and increased stamp duty on luxury premises prompted speculators to divert their investments to small and medium-sized homes, as well as commercial buildings.

As a result, the prices of these properties soared, hindering the ability of average buyers to get into the market and limiting the ability of small and medium-sized enterprises to buy their own premises. In response, the government extended these measures to include all properties, with the maximum loan for a HK$7 million residential property also lowered to 60 per cent of its value, ultimately causing the market to stagnate.

With the introduction of the individual visit scheme in 2003, we have seen a surge in mainland visitors. They came to Hong Kong to shop, buy flats and give birth - in turn promoting economic development and creating employment opportunities.

However, failures in government land planning have resulted in a severe shortage of retail and residential land supply, and a substantial rise in rents has increased both living and business costs. There have been complaints about a shortage of housing, hospital beds and milk formula, as well as other daily necessities.

In response, Chief Executive Leung Chun-ying levied a buyer's stamp duty on non-permanent residents. He also imposed restrictions on milk formula purchases, and put a stop to mainland women giving birth here.

Such policies have quelled local discontentment in the short term, but have hurt Hong Kong's reputation for a free business environment. As long as investors abide by laws, including those governing product and service safety regulations, and with the competition laws that will be in place soon, the government should not interfere through administrative means that stifle market development.

The administration has ramped up efforts to regulate housing, free television, education, medical and health care (including the beauty business), and other industries; there have even been selective regulatory measures in the highly competitive retail industry (including limits on milk powder and levies on bottled drinks). Such extensive government interference in the market is worrisome.

For example, besides being hit by the two-can limit, infant formula products may yet be the victim of further government tightening. It has now been more than a year since the administration introduced the "Hong Kong Code of Marketing and Quality of Formula Milk and Related Products, and Food Products for Infants & Young Children".

This code intends to ban the advertising of milk powder for infants under the age of three, and to restrict the use of trademarks and the manufacturers' ability to provide product information to mothers and carry out activities promoting formula milk. By comprehensively banning such advertising, are we meant to believe that milk powder is harmful to babies and, as such, warrants measures equivalent to those imposed on the marketing of cigarettes?

The government has been using licensing, taxation, subsidies, quotas and bans on advertising and promotional activities in a blatant attempt to limit competition. Not only have these efforts failed to serve the public good, they encourage anti-competitive rent-seeking activities, and prompt the business community to waste resources on fighting for preferential policies. In the end, all of these have a negative impact on Hong Kong's competitiveness and long-term economic development.

Lam Pun-Lee is an economist and former associate professor in the School of Accounting and Finance at Hong Kong Polytechnic University


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This article is now closed to comments

Libertarian economists may take issue with these developments but I see none of them reducing the enormous quantities of money flowing through HK. Surely the real point is that the traditional economic freedom indicators are no longer relevant here as market distortions and poor governance steadily erode quality of life and amplify wealth disparities. Until these things are properly addressed, good luck making me care about "the world's freest economy".
I agree with Lam Pun-Lee’s comment but not all among its very long list of what’s wrong with CY Leung’s actions as he sees them.
Foremost, Hong Kong needs not tinker with its in and out of using property development as its pillar industry since the colonial days. The prosperity in Hong Kong is to have a diversified means of livelihood run by a diversified able people. Yes hopefully the coming inception of the competition law would have teeth enough to do that. For the operation of the government is not to stand in the way of competition law in practice. First, delink its revenue from property and hence remove the dependency and collusion with the property developers. Second, it must institute sales tax and tax on dividend as income. Aim a budget not for surplus but just sufficient to pay bills. I am asking Hong Kong to reform its means of livelihood by dropping the property games.
To psl...
My comment from ‘Peering into the property market crystal ball for the year ahead’ in SCMP’s Property Section:
Why a flat should where one lives subject to a market. We don’t do it with rice. This article is self-serving to both the author and SCMP’s Property Section. Hong Kong’s property sector indulges in economic parasitic activity living off from the public -- by doing the minimum actually. Yet they are rewarded the most.
I am looking forward that SCMP will drop this Property Section. Bad influence.
High property prices and rent is a result of the "truly free market".
To Camel,
Not in Hong Kong. It is by the effect of collusion between government and property developers.
But free market is an obsolete economic concept and that is why the Heritage Foundation can't find it anywhere else but in Hong Kong by rigging submission of statistics to please the Foundation.
The three fundamental flaws of LPL’s exposition
are manifest in its presumptuous headline
that refers to “market” and “truly free” without clarification
and neglects to explain why a “truly free market” is desirable
The market is viewed simplistically as a category
where economic goods are exchanged thru demand and supply
1982 Petrus Pomerol and Budweiser are accorded equal status
In Lpl’s words: ‘the property market”
as if starters’ $5M units, trade-ups’ $10M to $30M units are the same
as investment real estates of each over $100M
“Truly free” presupposes an absolute true or false standard
This defies the experience of Harvard Business Dean Thomas McCraw
who holds that the most difficult management issue
is about where and how much to centralize or decentralize decision making
In the past many HK residents were so proud that many of the richest people on the Forbes list were from HK. Now, many realise that those tycoons were created/nutured by the governments past laissez-faire and high land value policies and that the wealth of those tycoons come at the expense of the average HK citizen.
I agree that the HK government should reduce its reliance on land/property related revenues. By controlling the land supply and reaping the benefits of high land prices, there is a fundamental conflict of interest. Unless the government broadens the tax base, there is always the temptation to jack up land prices to balance the budget.
Current HK society is not the same as what it was 20/30 years ago, when many residents were willing to work hard to climb the social ladder. Entrepreneurism is being strangled by high rents. Fresh entrants to the work-force see little incentive to save as most will never be able to afford the downpayment for a flat. The simple and low tax regime of HK's past might have worked then, but is out of date. What taxes do we have :
Profits tax, most of it paid by property developers and financial institutions.
Salaries tax, again mostly paid by employees of property developers and financial institutions.
Property tax, only on rents and not capital appreciation.
Stamp duties, mostly from property and share transactions.
The view seeing our living quarters as property market is a strange notion. It is subjecting Hong Kong people constantly with a heightened view of one’s very basic need in the context of a market. Certainly, we don’t treat rice like that albeit it is all under control of few supermarkets.
I don’t see how Hong Kong can move ahead economically without creating more social problems by not giving up property development as a pillar industry. There is absolutely no reason for majority to live unhappily to stay together as a society.
The new taxes that stopping property speculators must follow up by more executive orders to fundamentally reform the economy of Hong Kong. I trust the Leung’s administration is working towards that goal.
Well, that's a good recounting of the symptoms. What are the solutions apart from "must back off"?
'Lam Pun-Lee is an economist and former associate professor in the School of Accounting and Finance at Hong Kong Polytechnic University'
Judging by his comments in bean counting he hardly qualifies to view Hong Kong's problems much similarly of the Heritage Foundation which he so attached. Totoally blind and irrelevant. A comment that penned on behalf of the old existing vested interests in Hong Kong.


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