Why scrapping special stamp duty would help alleviate Hong Kong’s housing shortage problem

In November 2010, the Hong Kong government imposed a special stamp duty (SSD) on individuals and companies that acquire a residential property in Hong Kong and resell it within 36 months. The sellers need to pay an SSD equivalent to 20 per cent of the transaction price if they resell their home within six months of the purchase date. The SSD is reduced to 10 per cent if the property is sold within 12 to 36 months of the purchase date.

In the decade before the introduction of SSD, home prices increased by 96 per cent, and there were about 8,000 residential property transactions per month, on average. Now, we are only a few months away from the 10th anniversary of the SSD. As of the end of March 2020, home prices had surged 129 per cent, while the average number of transactions per month tumbled to some 5,300, down almost a third, according to official data. Secondary transactions accounted for most of the drop, as there were over 6,000 per month before the SSD compared to some 3,000 now.

Although there are other types of stamp duties currently in place to restrict speculative demand from both local and overseas investors, such as the Ad Valorem Stamp Duty (AVD) and Buyer’s Stamp Duty (BSD), their adverse impact on transaction volume has not been as significant as that of the SSD. For instance, total transaction volume declined by only 27,600 in the first 12 months following the implementation of BSD, while it dropped by 33,700 in the year after the start of the SSD.

The government implemented the SSD to suppress investment demand and price growth of residential properties to help more first-time buyers to get on the property ladder. However, the SSD has failed to serve this purpose, especially helping first-time buyers. Residential units valued at HK$3 million to HK$5 million were previously considered “starter homes” for domestic buyers. Before the SSD, there were over 2,000 transactions per month for home units in this price band, but this has now been slashed to fewer than 900 transactions per month.

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The Hong Kong Monetary Authority adjusted the mortgage rules in October 2019, allowing mortgage loans of up to 90 per cent of the cost of a home for first-time homebuyers purchasing completed homes valued at up to HK$8 million, thus making the SSD counterproductive, as it is limiting supply in the market. Even with the aid of the mortgage insurance programme, new prospective first-time homebuyers previously would have needed a down-payment of HK$1 million to purchase an affordable home valued at HK$5 million. They need to pay only HK$500,000 under the current mortgage rules, provided that they pass the stress test.

There is concern that relaxing the SSD would trigger a new wave of price increases and worsen the current affordability problem. This does not seem to comply with the basic economics of supply and demand when the market is facing a supply shortage. Removing the SSD would help increase market supply and drive the market price back to equilibrium. In addition, any derived speculative demand would continue to be limited by the imposition of the AVD and BSD.

In a falling property market, the SSD will foster the growth of negative equity cases, as many sellers are discouraged from selling their units by the extra transaction cost. It not only stops cash-strapped owners from liquidating their assets; it also encourages sellers to lower their asking price, as they try to shift the SSD burden to homebuyers.

The government should consider optimising the SSD mechanism by revisiting the prevailing rates with reference to recent price movements. Residential prices were up by 26.1 per cent and 23.7 per cent in the two years before the introduction of SSD, following the recovery from the global financial crisis, while increments were down to just 1.9 per cent in 2018 and 5.5 per cent in 2019. With home prices marching into negative territory in the first quarter of 2020, the current SSD rates no longer make sense under the prevailing market situation.

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One solution is to drastically shorten the 36-month window of the SSD to boost market supply and facilitate transactions, especially for starter homes. The government forecasts there will be some 95,000 residential units available in the next three to four years, but we expect only 85,000 units up to 2024.

Relaxing or eliminating the SSD would temporarily alleviate the housing shortage problem until a sustainable housing solution can be found.

Martin Wong is associate director of research and consultancy for Greater China at Knight Frank