It's no secret that since late 2009, there have been valiant attempts to moderate the rise in property prices in Hong Kong.
In the past three years the government and related agencies have intervened in the property market no fewer than 25 times, introducing additional stamp duties - a Special Stamp Duty and a Buyers' Stamp Duty - and mandating banks to lower their maximum mortgage advance ratios and run increased interest rate stress-test scenarios. Most recently, it doubled ad valorem stamp duty rates.
Given Hong Kong's fixed exchange rate system and the United States Federal Reserve's unprecedented multiple rounds of quantitative easing, the city has no option but to import a low-interest-rate regime and watch billions of dollars pour into the property markets unfettered.
With the barrage of direct and unprecedented government interventions in the local property market in the past three years, have these measures achieved their unspecified goal? If the goal has been to moderate the rise, or dampen residential property prices, the data shows that the collective measures have been largely ineffectual, as prices have continued to rise by 35-40 per cent since the first measures were implemented in 2009.
Interestingly, most of the measures have targeted transactions (flow) rather than existing holders of property (stock). For example, in November 2010, the Special Stamp Duty was introduced to disincentivise short-term buyers/investors. On the surface, it succeeded in eliminating confirmor purchases of new homes and significantly reduced speculation in the secondary market.
However, the reduction in property market liquidity created unintended consequences that continued to drive prices higher as intrinsic demand from genuine buyers remained strong against a market backdrop with substantially reduced liquidity. Rather than step back and ask why the measures have not succeeded, or which measures would be more effective, the government continues deeper into uncharted territory.
A broad spectrum of market watchers have suggested the government communicate when it will retreat from market interventions and allow transactions under normal conditions.
While analysing the impact of the current measures is important, there are other measures that would be more effective at addressing the root of Hong Kong's surging property prices, rather than its symptoms.
First, contrary to policies, maintaining unfettered market liquidity is critical in achieving the desired goal of dampening property prices. When liquidity is artificially withdrawn from a market, the normal price-clearing mechanism where a willing seller and a willing buyer agree to transact is altered (as is the case with the recent stamp duties).
Second, most market experts agree that property financing costs are usually one of the main drivers in deciding whether to rent or buy. In Hong Kong, with negative real interest rates and mortgage rates substantially below rental yields, it's no wonder that more people are buying - even at today's record prices.
Here are three concrete measures to directly address the property bubble:
- increase financing costs;
- increase government rates;
- introduce a property-only capital gains tax.
With the government continuing to advocate maintaining the US dollar peg, which results in disproportionately low financing rates and inflated asset prices, the Hong Kong Monetary Authority's action on February 22 to increase the banks' capital-risk weighting of residential mortgages by 50 per cent (from 10 per cent to 15 per cent), was a key contributor to banks' increase in mortgage interest rates of 0.25 per cent shortly thereafter.
Anecdotal evidence suggests that this increase in mortgage rates and the expectation of future rate rises is largely responsible for the nominal reduction in property prices. Prior to the Basel II rules, which set global minimum capital requirements for banks, the HKMA permitted a concessionary risk weighting of 50 per cent for residential mortgages. Therefore, it still has ample room to bring mortgage rates in line with market levels.
For a more direct and equitable impact, the government should consider increasing the cost of holding properties by increasing annually assessed rates.
In Hong Kong, government rates for homes are approximately 0.1 per cent. Because nearly all properties are leasehold, the government assesses an annual rate based on rental value, rather than assessing a property tax.
In many other countries, property taxes have proved an effective tool in moderating price increases. California charges an annual property tax of 1 per cent of the assessed value, and in London the rate is 1.4 per cent. Therefore, with low mortgage financing rates hovering at 2.5 per cent and meagre government rates (10 basis points), the cost of holding properties in Hong Kong is among the lowest globally.
While advocates of Hong Kong's simple and low tax regime would consider this final suggestion a heresy, a capital gains tax on property would be a more effective tool in managing speculators and more equitable in taxing "gains" rather than transactional value as in the case of the Special Stamp Duty. This duty is assessed even if the buyer has sold their property at a loss within the initial three-year holding period.
Almost all developed countries, and China, have a capital gains tax on properties. This is generally accepted as fairer. Why not Hong Kong?
Leland Sun is managing director of Pan Asian Mortgage