Hong Kong Property: Forget about Special Stamp Duty

The special stamp duty (SSD) imposed by the government and its subsequent controversy about the accuracy of the widely-used Centa-City Leading Index are, in my view, not very important.

Going back to my theory on what drives Hong Kong Property Prices, Hong Kong home prices are pretty much liquidity or money supply driven. As long as money is still around the region, the administrative measures that the government take is not going to help because it is not really hitting the core of the problem. It might be true with these extra stamp duty, speculators and investors will put their money in other thing, like commercial properties or stocks, so the demand for residential properties might be less, but the truth is that property speculation is relatively rare even before the extra stamp duty was announced, and the government knew that (e.g. property being resold within one year of the purchase accounted for roughly 10% of total transactions). Worse, people who now buy homes will most likely not sell their homes within 2 years as they wish to avoid paying the stamp duty, which means that should the property market continue to stay firm, the supply of flats will most likely drop.

So what is the balance of the game now? People buying properties often have the notion that it is an inflation hedge. As China inflation is edging higher, and because Hong Kong are consuming a lot of stuff made in China, together with the slowly appreciating Chinese Yuan and HKD peg with the USD, there is a possibility that inflation in Hong Kong will run out of control next year. This will provide good reason for bulls. The expectation on the US also remains that the Fed will not raise interest rates for an extended period of time, and the US dollar will remain weak. This will be another good reason for bulls.

How about the bearish arguments? First, if the Euro crisis turned nastier, there would be a probability that money is going to get out of risky assets like Asian equities or real estates. Second, the expectation that interest rates would remain low for a long time may turn out to be false. The recent rise in bond yields all over the world may be interpreted that economic growths are speeding up, and inflation expectations are higher, suggesting that interest rates may go higher much earlier than expected. Also, from the banks’ perspective, the extreme low rates now are squeezing their margins, which is not sustainable as far as banks’ earnings are concerned. Perhaps a 10 or 20 basis points rise in mortgage rates in Hong Kong might not be consequential, but the trend is indeed going against the bullish mood in the property market. Finally, if US dollar strengthened, contrary to most people beliefs, sooner or later, that will become a reason for people to sell.

So on the balance, my guess is that there might be still upside at the current price level, but the risk-reward profile is getting increasingly unattractive, and we should be aware of possible Black Swans which may lead to sudden reversal of the market.

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About Zarathustra

Zarathustra: Founder and Managing Editor of Also sprach Analyst. Once an analyst, now an investor and entrepreneur. Based in Hong Kong, but Londoner at heart.