Vancouver should look to Hong Kong for lessons in cooling property prices
Richard Cullen says Hong Kong’s stamp duties have proved effective in reining in runaway prices, and other cities – particularly those struggling to cope with cashed-up Chinese buyers – could follow suit
In cities across the developed world, especially in jurisdictions popular with Chinese immigrants, there are deep concerns about rapid, residential property price inflation. It is argued that this is putting ownership beyond the reach of increasing numbers of local residents seeking to buy their first home.
The media in Melbourne and Sydney, in Australia, for example, carry almost daily stories on this theme. It would seem, though, that the global “leader” in this regard may be Vancouver, Canada. Early in May, it was reported that the benchmark price for a house in the Vancouver region was C$1.41 million (HK$8.4 million) – up 30.1 per cent in one year. (In fact, Vancouver’s problems with excess offshore-sourced demand date back over 30 years to the time of the first major, Hong Kong Chinese immigration wave.)
In all three cities just noted – and in most of the cities feeling this pressure (including Hong Kong) – there is a fundamental, underlying problem of demand exceeding supply. Limits on land supply, planning controls (and related complexities) and increases in building cost explain much of the supply-side problem. In all such cities, immigration is driving populations up, year after year, intensifying the demand. These cities are attractive in a number of ways, often in terms of providing good, comparatively lower-cost educational opportunities.
When one adds into this mix a cohort of buyers who are especially “cashed-up”, which, today, means mainland Chinese above all, the affordability problems are amplified. As it happens, these buyers are often strongly focused on long-term educational opportunities, they value “save-haven” investing and they are also used to assisting one another with real estate purchases.
There is no “magic wand” fix for this problem. But Hong Kong has clearly done more than most, in an effective way, to bring the problem under a level of control. There is much that Vancouver could learn from the SAR.
The provincial government in British Columbia, where Vancouver is located, imposes a property transfer tax on real estate transactions. In terms of structure and operation, it is the equivalent of the stamp duty we pay on real estate transactions in Hong Kong. It applies at a rising rate from 1 per cent to 3 per cent depending on the market price of each transaction.
Over 20 years ago, Hong Kong moved to impose stamp duty on “flipping” transactions involving residential real estate. British Columbia still has no such provision within its property transfer tax – although it is belatedly moving to impose some quite limited restrictions (so limited, it is hard to see them having any cooling effect at all).
More recently, Hong Kong has acted to hose down excessive speculative activity in the residential market by perhaps the most innovative use of stamp duties seen anywhere.
First, we had a special stamp duty, which took effect in 2010 and which now normally imposes very hefty duties of up to 20 per cent on any, too rapid, resale of a property. Next, from 2012, we introduced a buyer’s stamp duty, where, broadly, a non-permanent resident who purchases property in Hong Kong has to pay an additional 15 per cent duty. Finally, from 2013, we introduced a double stamp duty where anyone who already owns a relevant property in Hong Kong at the time of purchase of a second (or third, etc) property essentially has to pay double the regular amount of stamp duty.
A significant affordability problem remains in Hong Kong for first-time home buyers but the acceleration of that problem has been stopped and, now, in fact, residential property prices have retreated by 10-15 per cent. It is clear that the combination of special stamp duty, buyer’s stamp duty and double stamp duty has played a significant part in this outcome.
This policy approach has, so far, also reduced the “property bubble” aspect of price inflation in Hong Kong, without triggering a price collapse such as occurred so severely around late 1997.
All of these Hong Kong measures could be applied in Vancouver, with a realistic expectation that a measure of control could be achieved. At the same time, one could expect to see a significant swelling of public revenues, as has happened in Hong Kong.
Might such measures yet come to be applied in Vancouver? Don’t hold your breath: those doing very well from the prevailing system have long been keen financial supporters of the main political parties in British Columbia. This could explain why there has been so much hand-wringing over the problem in Vancouver across the past several decades – but so little action.
Professor Richard Cullen is director of the tax law research programme in the Faculty of Law at the University of Hong Kong