Drastic measures necessary to stabilise Hong Kong property market
Anthony Cheung says the government's drastic measures to curb property speculation and stabilise prices are needed in these exceptional times to avoid the risk of a massive bubble
The Legislative Council will resume the second reading of the Stamp Duty (Amendment) Bill on Wednesday. The bill, if passed, will end the extended period of uncertainty in the market over the demand management measures introduced by the government in October 2012 - namely, an enhanced special stamp duty to curb short-term speculation and a new buyer's stamp duty to raise transaction costs for everyone except Hong Kong permanent residents.
The additional measure introduced by the government in February last year, namely the doubling of ad valorem stamp duty for all property transactions, whether residential or non-residential, is under scrutiny by another Legco bills committee.
These demand management measures are not introduced casually. They are extraordinary measures to cope with exceptional circumstances. Before the 2012 measures were announced, residential property prices had increased by 24 per cent just between January and October that year, doubling the 2008 level.
After the announcement of the measures, prices moderated, but only for a while before soaring again. During January and February last year, residential property prices increased by a monthly average of 2.7 per cent.
Meanwhile, non-residential property prices similarly spiralled upwards - prices of retail, office and flatted factory space surged by 39 per cent, 23 per cent and 44 per cent respectively in 2012. In the face of the undue market exuberance, the government had to intervene again, by way of last February's doubling of the ad valorem stamp duty. The Monetary Authority also imposed new requirements on mortgage borrowing to send a clear signal to the banks that they must be cautious in their lending.
Since then, the market has gradually stabilised. From March last year to January this year, housing prices by and large stayed calm, recording an average monthly increase of only 0.2 per cent. As of now, sentiments remain volatile but the public clearly recognises our determination to maintain stability in the property market.
Critics fault the government for such intervention. But what would have happened if the government had not intervened? The property bubble, driven by unduly low interest rates and abundant liquidity fuelled by the quantitative easing policies of some developed economies, would have posed a larger risk to our macroeconomic and financial stability.
Hong Kong is not alone in taking drastic measures to manage demand, but we remain committed to maintaining a vibrant free market economy. International think tanks such as the Heritage Foundation and Cato Institute continue to rank Hong Kong as the top free market economy. Singapore, ranked behind Hong Kong, has imposed more and similar demand management measures.
Indeed, a recent research paper published by the Bank for International Settlements has concluded that among housing market stabilisation policies, a change in housing-related taxes is the only policy tool with discernible impact on house price appreciation.
The government has, from day one, made it clear that it will taper or withdraw such measures to swiftly respond to changes in market conditions through subsidiary legislation by the well-established practice of "negative vetting". This will allow adjustments to be effected immediately after the subsidiary legislation is gazetted. Legco can still amend the legislation later if members see the need to do so.
In the case of "positive vetting" (as proposed by one member's amendment to the bill), the amendment legislation can take effect only after a period of notice to Legco, to be followed by committee scrutiny before passage and gazetting, thus undermining the responsiveness of the adjustment and creating market uncertainties in the meantime.
Some legislators have proposed that an exemption from the buyer's stamp duty be granted to companies set up by permanent residents. The government cannot agree to that. As repeatedly explained at the bills committee, it is very easy to set up and trade in the shares of companies in Hong Kong. This is one of our strengths. However, it is so difficult to track down the ultimate beneficial interests of companies buying the properties that the proposed exemption would virtually open a backdoor for buyers outside Hong Kong to evade the duty by securing a controlling interest in a company set up by a Hong Kong permanent resident.
Similarly, exempting charitable organisations from the buyer's stamp duty would also provide a loophole. At present, there is no proper regulatory regime for charitable organisations.
The recognition of "charitable organisations or trusts" under section 88 of the Inland Revenue Ordinance is to exempt them from profits tax; these charitable organisations are still required to pay ad valorem stamp duty just like any property purchaser. Under the present bill, charities are already exempted from buyer's stamp duty for properties received as donations.
The government does not consider any sunset provision, which specifies a definite expiry date for a law, to be appropriate. We have no crystal ball to suggest when the market will return to a more stable situation that would allow us to withdraw the measures. Committing to any arbitrary date might encourage attempts to manipulate the market ahead of the expiry date.
The government has to consider a range of factors in arriving at a decision on tapering or withdrawal - such as the state of the economy, the property market conditions and policy measures of other countries, notably the pace of tapering in quantitative easing measures by the US and European economies.
We have already undertaken to revert to Legco one year after the legislation is gazetted, to review the market situation and to listen to legislators' views. Should the market face any drastic changes warranting an immediate policy response, an amendment by subsidiary legislation through negative vetting is the best means to ensure such a response is promptly put in place.
We acknowledge that the present demand management measures unavoidably affect some segments of our community; but without them, the overall community interest would be harmed as the housing price and rental hikes would undoubtedly have continued unabated, resulting in a much greater risk of the property bubble growing, ultimately to the detriment of everybody, whether a permanent resident or not.
Professor Anthony Cheung Bing-leung is secretary for transport and housing