Market changes call for stamp duty alternative
While we appear to be approaching a sensible equilibrium between supply and demand, the time may be right for a more suitable tax
Is now the right time to replace the Buyers Stamp Duty?
Following the inertia of the previous two administrations as regards land supply, the current administration has gone into overdrive in its attempt to catch up and remedy the situation. But I am now concerned that this may be being overdone and that we may soon face a similar situation that arose in 1997/8.
The current Buyers Stamp Duty (BSD) is only really effective in a rising market and a more equitable form of tax such as a Capital Gains Tax (CGT) now needs to be planned for and implemented as a replacement as the market corrects.
In the run-up to the handover when there was a similar escalation of property prices, in spite of a 50 hectare quota, the British & Hong Kong side of the Land Commission sought and obtained agreement to sell much more land. In the years between 1994 and 1998 around 86 hectares of residential land alone was sold, averaging over 21 hectares per annum.
As a result, private residential housing starts significantly increased with an average of over 32,000 units per annum in the period from 1998 to 2000. Compare this to the five years between 2005 and 2009 when a dismal total of 26 hectares of land was sold, barely averaging 5 hectares a year.
Predictably, the number of private residential housing starts plummeted to an average of around 10,500 per annum for the period 2007 to 2010. Only in the last year has the position started to improve with some 25 hectares of residential land having been sold in 2012/13 and over 46 hectares being brought forward in 2013/14.
Residential housing starts have correspondingly also picked up, with some 15,000 units started both last year and the same number predicted for this year. These numbers are close to the Financial Secretary's desired output of 20,000 units per annum.
So finally, after many years of shortage of land supply, we seem to be approaching a sensible equilibrium between supply and demand that should in turn feed through to an adequate number of new residential units coming to the market.
However, I am very concerned by all the other plans for cranking-up land supply that the Chief Executive outlined in his January Policy Address could have the effect of tipping the balance, similar to the infamous 85,000 units articulated at the beginning of CH Tung's administration in 1997.
Today 36 government-institutional or community-use sites with an area of 27 hectares are to be rezoned for housing to provide around 12,000 units; 13 'green-belt' sites are being considered for rezoning to residential use that could yield 23,000 units; and some 27 hectares of industrial land is considered suitable to be rezoned for about 15,000 housing units.
Add to this the 533 hectares of developable land predicted to become available for both public and private housing in the North East New Territories Development Areas, and a similar 400 hectares at Hung Shui Kiu, and you get a sense of the massive volume of land that is now potentially available in the short, medium and long-term. If this supply is not managed properly, it could potentially upset the equilibrium of the market, bearing in mind that I have not included the hundreds of potential hectares that the government is intent on producing by way of reclamation.
These are all internal matters over which we can, in theory, have some control. But there are significant external issues over which we have absolutely no control - in particular our interest rate regime which is, as consequence of the peg, tied to that of United States dollar.
As we all know, US interest rates have been kept at artificially low rates as a result of the Quantitative Easing strategy. But it is generally accepted that this will not last forever. Interest rates are bound to go up and when that happens this could have a much bigger impact on the local market than all the measures now being pursued by our government.
So I think our government should now be planning ahead to anticipate this event.
The introduction of the Buyers Stamp Duty (BSD) in October last year, together with all the measures proposed to increase land supply and consequently flat production, have begun to have the required effect of dampening prices by, hopefully, balancing out the supply and demand sides of the equation.
If the purpose of the current stamp duty rules and regulations is to help curb speculation and hence prices in the residential market then I would suggest that it would be fairer and more equitable to replace it, as is currently being introduced in certain cities on the mainland, with a Capital Gains Tax (CGT). All property transactions are registered, so it is a simple matter of establishing the buying price and date of sale and similarly establishing the selling price and date of sale.
If it is proposed to impose CGT for transactions within a specified period, say two or three years, and if the selling price is greater than the buying price, a tax is levied on the gain. If the reverse is true then no tax is levied.
This should help free up the market as it starts to correct. Retaining the current stamp duty regime will mean that duty would be payable irrespective of the transaction prices which could prove to be a serious obstacle in a falling market. This form of CGT could then be retained to curb any speculative excesses that may occur in the future.
Another good reason for finding an alternative to the BSD has emerged as it now appears that an unintended consequence has been its impact on developers active in site assembly of old buildings for redevelopment under the Land (Compulsory Sale for Redevelopment) Ordinance.
Since the ownership threshold for triggering such a sale was lowered from 90 to 80 per cent in 2010, the number of applications to the Lands Tribunal rocketed up to 57 last year, including 25 in the first quarter. However since last October when BSD was enacted only seven applications were made in the first quarter of this year.
Surely this was not the intention? Because the use of the Ordinance was beginning to result in a significant numbers of new units being built as well as making a meaningful contribution to urban renewal, and this should be allowed to continue.
So please can we see a little vision and forward planning?
Roger Nissim is an adjunct professor in the Department of Real Estate and Construction at the University of Hong Kong