What’s behind Hong Kong’s push for a vacancy tax on empty homes – and will it really work?
What’s the plan and why do some pundits find the idea less than exciting?
Hong Kong leader Carrie Lam Cheng Yuet-ngor is set to discuss a plan to introduce the city’s first vacancy tax with her top advisers on Thursday.
The aim of the tax is to release more flats and prevent developers from hoarding newly built flats, amid ever-rising prices in the world’s least affordable property market. So what is the plan, what does the tax mean for Hong Kong and why do some pundits find it less than exciting?
What’s the vacancy tax plan?
Although Lam has been tight-lipped about details, one proposal that has been leaked to the media suggested that all new flats that had been left unsold for more than a year would be subject to the tax, which would be twice a home’s rateable value.
The rateable value is the estimated annual rental value of a flat, calculated by government specialists and based on market rates. For example, if a new 500 sq ft flat can be rented out in Wan Chai for HK$40,000 (US$5,130) a month, its rateable value is HK$480,000, so the vacancy tax would be HK$960,000 under the leaked proposal.
But it remains unclear how the government will define completion of a flat. The government requires developers to complete projects – which means to obtain an occupation permit – in a specified period, usually four to six years from when the government grants a developer a lease. Developers can get the permit before completing peripheral works such as indoor shelving, outdoor greening, building footbridges and furnishing open spaces.
Although flat owners can move in with the permit, developers still have to finish all the related works to get a certificate of compliance. There is no deadline for developers to get this certificate.
If the government defines completion by the day of getting the certificate, developers can potentially abuse the system by taking as long as possible to finish projects, leading to de facto hoarding.
Why does the government want this tax?
The first clue about the tax came from Financial Secretary Paul Chan Mo-po a day after he delivered his budget speech in late February. Chan vowed to stop developers from hoarding flats, saying the number of unsold units in completed projects had been on the rise while the government was breaking its back to increase housing supply.
Continuously rising property prices – for 25 straight months by the end of April – have fed into public anger, with some even saying unaffordable housing is behind some young people’s wishes for the city to become independent from China. It has been speculated that the government is under pressure to seek quick fixes for the housing issue.
Immediate solutions seem to be few and far between. The government has invited the public to give its opinions on 18 proposals to source more land to plug a projected shortage of 1,200 hectares for housing and economic development in the next three decades. But even the quickest proposals may only yield results in about a decade.
Who might the tax affect and how have they reacted?
Developers, long criticised for hoarding flats, are the target of the tax. Hang Lung Properties, for example, built The Long Beach in Tai Kok Tsui in 2005 but still has not sold all of the flats.
Not surprisingly, many developers are upset about a tax. Stewart Leung Chi-kin, chairman of the Real Estate Developers Association’s executive committee, said some of its members had sought legal advice to see if the tax would affect their property rights in any way.
Leung called the government’s estimation of 9,000 vacant flats “misleading”, saying many were properties for rental only. He also urged the government to define completion as when a flat gets a certificate of compliance, under which there would only be 3,000 vacant flats.
He also wanted homes bigger than 1,000 sq ft – which often fetch world-record prices – to be exempted from the tax, because he said these flats belonged to a different market with much slower sales.
Will the tax work?
So far the plan has received a lukewarm response from tax experts and economists.
Marcellus Wong Yui-keung and Professor Liu Pak-wai, both members of the previous government’s Working Group on Long-Term Fiscal Planning, said it could be effective if it was high enough to hurt. They also believed it would not affect Hong Kong’s simple tax system or add much to administration costs because it was based on the existing rateable value system. But both believed a more direct method would be to set a sales deadline in the land tender, which developers would have to stick to.
Economist Terence Chong Tai-leung worried that developers might increase flat prices to offset the vacancy tax. He also suggested they could set up non-public companies to buy unsold flats cheaply, so they could continue to hoard units on the second-hand market, which would not be affected by the tax.
Any overseas examples of a vacancy tax?
In Singapore, developers must complete and sell all the flats within five years of being awarded the contract, or face a penalty of at least 10 per cent of the land cost.
Vancouver taxes homes of non-principal residents that are left empty for more than six months a year an amount equivalent to 1 per cent of the properties’ assessed taxable value.
In Australia, Victoria state imposes a “vacant residential land tax” on absentee homeowners in Melbourne, which is set at 1 per cent of the value of a house not occupied for six months a year.
Paris has set its vacant home tax at 60 per cent of a flat’s fair market rental value.
Many British cities slap an extra 50 per cent on a standard property tax owners already pay if they leave their home empty for at least two years.
Additional reporting by Naomi Ng