In 2010, the Hong Kong Government introduced a raft of austerity measures aimed at curbing speculative activity in the city’s residential property market. Among these was a Special Stamp Duty (SSD) on residential property transactions. Residential properties acquired on or after 20 November 2010 and resold within 24 months are now subject to 5-15% tax of the transacted value, depending on the duration of the holding period.

One year on, the consensus among most market commentators is that the SSD has been effective in keeping short-term speculators away from the local residential property market. Anecdotal evidence suggests that purchases over the last 12 months have largely been for self-occupation or long-term investments. Moreover, the introduction of the SSD coupled with the more recent global economic slowdown has led to a significant drop in residential transaction volumes. Only a total of 75,366 residential Sale and Purchase Agreements were registered with the Land Registry in the first ten months of 2011, 33.5% less than for the same period one year earlier.

In view of the changing market conditions, some local realtors have recently called for the SSD restriction to be loosened, arguing that the additional cost involved has affected market liquidity, resulting in a sluggish sales market. To their dismay, the government announced on 23 November that it has no immediate plans to review the SSD, which means that the tax will likely remain in effect for the full two years as originally planned.

With interest rates still remaining low compared with historic levels and new supply remaining limited over the near term, I see no harm in leaving the SSD in place in the meantime. However, if the economy slows further next year, as most economists expect, this may lead to a weaker local labour market and force some property owners to liquidate assets to free up much needed funds. In this regard, the SSD will potentially affect the liquidity of some potential sellers.

As the market changes swiftly reflecting the external environment, the government should review and assess the efficacy of the SSD and stay flexible on policies based on prevailing market conditions. Loosening the SSD restrictions may be an option for a more stable development of the property market if the economy worsens further. After all, the purpose of the SSD is to penalise speculators, not place additional hardship on legitimate end-users being forced to sell.

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