More measures launched. where is the Hong Kong residential market headed?

November 7, 2012 / By

A new round of restrictive measures was introduced by the Hong Kong government, effective 27 October 2012, to raise purchasing and resale costs of residential properties for non-local buyers, companies and the so-called speculators, aiming to cool the residential market which the government thought was overheating.

One of the new measures was to increase the Special Stamp Duty (SSD) rate from 5-15% of the transacted value to 10-20% and extend its restriction period from two years to three. The more stringent SSD regime is a further tightening policy to curb speculative demand, if any. Demonstrated by the scarcity of confirmor transactions (i.e. deals in which properties are resold before the completion of the original transaction) in the existing market, accounting for only 0.6% and 0.1% of the total residential transactions in 2011 and 2012 year-to-date, respectively, the market has actually seen a very limited number of speculators after the last round of SSD in November 2010. Therefore, the revised policy is expected to have limited impact on the market.

However, the Buyer’s Stamp Duty (BSD) will likely have a more pronounced impact. In addition to the existing stamp duty, a flat rate of a 15% BSD will be imposed on non-local buyers and companies. According to the government, the number of residential transactions in the primary sales market taken up by non-local buyers rose from 5.7% in 2008 to 19.5% in 2011. Higher entry costs from BSD will cause non-local buyers to stand on the sidelines, thereby reducing a significant portion of demand, particularly in the luxury residential segment.

Moreover, I reckon the BSD is going against Hong Kong’s free market principle. In view of the faltering external environment, it is indeed common to see overseas investors parking their money in a place where assets have proved to generate attractive returns with high liquidity; Hong Kong is definitely one such place. And with the “tax haven” status, which the city has been famous for in the eyes of overseas investors, particularly Mainland Chinese buyers, I am not surprised to see “hot money” flowing into the territory. Now that the residential market appears to be policy driven, these investors will likely be cautious about policy risk. This may harm the reputation of Hong Kong as being the freest economy in the longer term.

Soon after the implementation of these measures, anecdotal evidence showed an immediate slowdown in sales activity. We expect the sales market will continue to be very slow through next year. Indeed, the new measures will further reduce the stock available for sale in the secondary market as existing owners will continue to hold their properties on the back of low holding costs and the positive carry environment. And if current owners were to sell now, they may not be able to re-enter the market due to higher entry costs.

We expect residential prices to drop by 5% through the remainder of the year. In the medium term, we believe the market will adjust to the new rules. Prices will hold firm, but sales volumes will remain subdued. Unless the external environment deteriorates suddenly and impacts the labour market, we are unlikely to see fire sales over the foreseeable future.


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