Hong Kong policy address 2023: will rolling back stamp duties lift Hong Kong’s housing market out of the doldrums?
- Developers and market observers urge the government to rescind the decade-old debilitating stamp duties to lift property prices and boost transactions
- Hong Kong’s property prices have fallen by nearly 15 per cent from a record high in September 2021, while overall transaction volumes have been subdued this year
Owning a house has been Michael Zheng’s top priority since he and his parents moved to Hong Kong from mainland China about five years ago.
“I can probably proceed with my plan to buy a home two years earlier than planned,” said Zheng, 31, who has two more years before he can apply for permanent Hong Kong residency. Non-local homebuyers are currently subject to various stamp duties of as much as 30 per cent to prevent speculation.
The flat Zheng is keen on – a 440 sq ft unit in Sheung Wan – is priced at HK$9 million (US$2.4 million), on which he will have to pay another HK$2.7 million as tax, 10 times more than permanent residents buying their first homes.
The levy is one of the reasons Zheng has deferred the purchase. “I will consider paying the down payment if the new policy of relaxing buyers’ stamp duty is announced.”
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“The cooling measures are completely inapplicable in today’s market because we are in a downtrend,” said Joseph Tsang, chairman of JLL Hong Kong.
Tsang said removing the measures would only slow down the property market decline. “The same situation occurred 14 years ago when the government imposed ‘spicy’ measures, hoping it would lead to a soft landing.”
But will the removal of stamp duties reverse falling transactions and lift property prices?
Several measures were launched to cool the market between 2009 and 2016 through increasingly higher taxes on property transactions in a bid to curb speculative demand and tamp down home prices that began their rapid ascent following the end of the Sars (severe acute respiratory syndrome) outbreak in July 2003. Monetary policies like lower loan-to-value ratios and tougher stress tests on buyers’ ability to service loans were also introduced to contain financial risks in an overheated property market.
The steps were also aimed at giving a leg up to Hong Kong residents who wanted to own homes in the city that consistently ranks as the world’s most unaffordable urban centre.
The moves had the opposite effect. Transaction volumes fell, while prices did not, which was attributed to external factors such as low interest rates and a favourable macroeconomic environment, which had a greater influence on the market.
“There are always cycles in the property market,” CEO Eddie Yue Wai-man told the Post in an interview this month. “This is exactly why we introduce all these countercyclical methods, which are meant to reduce the cyclicality of all these asset markets, especially the property market.
“Whether there is room to relax further, we must look at where the cycle is going.”
In 2009, the city’s de facto central bank directed lenders to tighten the loan-to-value ratio from 70 per cent to 60 per cent for luxury properties worth at least HK$20 million.
The HKMA also adjusted stress test requirements to determine the ability of borrowers to repay their mortgages in the event of higher interest rates. Another measure limited home loans for units costing more than HK$10 million.
This was followed by the Hong Kong government’s roll-out of the Special Stamp Duty (SSD) in November 2010. The SSD is applicable to any residential property that is resold within 36 months, with higher taxes applicable for shorter durations. Initially ranging between 5 and 15 per cent, it was raised to between 10 and 20 per cent in 2012.
A Buyer’s Stamp Duty (BSD) of 15 per cent was introduced in 2012 to suppress demand from non-Hong Kong permanent residents. This was followed by the Double Stamp Duty (DSD) in 2013 and the higher ad valorem (according to value) rate in 2016, which imposed bigger levies on buyers who already owned a home.
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It is not speculative demand which drives property prices higher but market fundamentals like low interest rates and supply and demand, according to Chau Kwong-wing, chair professor of real estate and construction at the University of Hong Kong.
“Speculators enter the market because they think property prices will surge. So when you impose SSD to drive away short-term speculators, does it mean that the property market will not go up? No.”
In 2023, despite several measures to rein in prices, affordability continued slipping out of the grasp of many of the city’s residents, with the savings needed to buy a home rising to 18.8 years of annual household income. That affordability stood at 12.6 years of savings in 2011, the year after most of the cooling measures were in place.
Meanwhile, Hong Kong’s lived-in home prices climbed 271.7 per cent from 2009 to September 2021, an all-time peak, according to a widely tracked government index.
The surge in home prices continued during the Covid-19 pandemic, prompting discussions about potentially implementing further tightening.
The measures collectively have only had a detrimental effect on transaction volumes, according to JLL.
In 2011, the average monthly residential transactions declined to 7,000 from 11,300 in 2010, according to data compiled by the consultancy. The volumes have trended lower since then, slumping to an all-time low of 3,800 a month in 2022 despite the government raising the mortgage cap for first-time buyers and relaxing stress test requirements last year.
“The average monthly transaction volume never returned to the level in 2010 after the implementation of various stamp duties,” said Cathie Chung, senior director of research at JLL. “We have not seen similar trends in home prices, as they are driven by many other factors. Home prices have risen robustly despite these stamp duties.”
In the 12 months after the introduction of the SSD, transactions slumped by 63.7 per cent from the same period a year earlier while home prices rose by 11.2 per cent in the same period, according to data compiled by Knight Frank.
The introduction in February 2013 of the DSD, which doubles the ad valorem stamp duty for those who already own residential property in Hong Kong, led to transactions declining by nearly half and prices rising by 1.8 per cent in the following 12 months, according to Knight Frank.
“You are only increasing the cost of the transaction, but the market fundamentals remain the same,” professor Chau said, referring to the low interest rates at the time, which Hong Kong enjoyed for 20 years until the recent rate-tightening cycle that started in March 2022. New housing supply also remained tight.
These favourable factors have since reversed.
The market is flooded with new flats, with unsold inventory levels in completed projects at the highest level since 2007, according to JLL. Some 8,800 new homes were sold in the first nine months of this year, according to Centaline Property Agency. The total for the year is expected to reach around 11,000, the second-lowest in nearly a decade.
Meanwhile, an index tracking lived-in home prices had slumped by about 15 per cent as of August from a record high in September 2021.
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Lingering macroeconomic uncertainties such as geopolitical tensions, China’s slower-than-expected economic recovery and elevated interest rates mean the Hong Kong government and the HKMA have to tread carefully.
“We relaxed some of our macro prudential measures such as the loan to-value ratio and the stress test,” the HKMA’s Yue said. “Depending on where the market is going, there could be room for us to think about adjustments if needed.”
Property stakeholders, however, are clamouring for more, urging the government to discard all stamp duties to boost demand and prop up the industry.
Even after property curbs are relaxed, home prices are unlikely to see an immediate rebound as the market is still hobbled by other negative factors, said Martin Wong, Knight Frank’s Greater China head of research and consultancy.
The removal of the cooling measures would boost transaction volumes but not prices, Wong said, an outcome all analysts fully agree with.
Rolling back the SSD would benefit the market the most, given the slowdown in Hong Kong’s economy, said Hannah Jeong, head of valuation and advisory services at Colliers Hong Kong.
“As we have gone through a recession and are likely to see marginal economic growth, cash needs to be circulated in the market,” said Jeong. “[SSD and BSD] are not very helpful to those families who need cash in the current economy.”
Professor Chau said when the cooling measures are removed more homeowners could be persuaded to sell their property. At the same time, developers are likely to take advantage and dispose of their unsold stock by sticking to their strategy of offering discounts.
“Hong Kong will not have the same old scene of people rushing to buy flats in future,” Chau said.
JLL’s Tsang said the market seems to be counting on the lifting of the curbs, but these alone will not be able to save the sector.
The government has to take into consideration a range of factors if the measures fail to live up to expectations, as it could lead to other wider problems in the economy, he said.
“If relaxing the curbs fails to revive home sales, what happens then?”
