Hong Kong Property: More measures to curb property prices

Today is the day of tightening.

Hong Kong

The Finance Secretary John Tsang announced a brand new and surprisingly tough measure to curb home prices in Hong Kong after the IMF said the Hong Kong government should act.

For all sales & purchase agreements signed from tomorrow onwards, if the properties are resold within 6 months, buyers and sellers will be subject to an extra stamp duty of 15% of the transactions. Reselling in 6 to 12 months will be subject to an extra 10% stamp duty, while 12 to 24 months, additional 5%.

This new measures are, to me at least, rather prohibitive for short-term speculative activities, as the highest basket of 15% is a rather huge amount. I believe as far as the policy itself is concerned, it is a right direction, and was in fact even more prohibitive that my proposal of capital appreciation tax earlier. However, as a long-run policy, this is, in my view, worse that capital appreciation tax, as this extra stamp duty is very prohibitive in short-term trading, and in case of sudden reversal of trend of property prices, property owners will be prohibited to sell their flats within 6 months or 1 year because of this extra stamp duty, which will probably hurt them even more in 2 years down the road. In contrast, my proposal of capital appreciation tax only tax capital gains, and if the prices are actually falling, sellers would get tax credits, which help the property market to absorb the shock. Also, property developers are not affected by this extra stamp duty. In case volume really drops, property developers can simply defer the selling, so it will not be very helpful to prevent developers to make hefty mark ups in prices.

The Hong Kong Monetary Authority will also ask banks to lower the loan-to-value ratio of mortgages further, and will be applicable to both residential and non-residential properties (details are still pending). For residential properties valued above HK$12mn, the maximum loan-to-value ratio will be lowered further to 50%. For residential properties valued at HK$8-12mn, the LTV will be lowered to 60%. For non-residential properties, the LTV will be lowered to 50%.

As far as the property market transaction volume is concerned, the new measures, especially the extra stamp duty, will prohibit speculators from entering the market, so in the short run we might see lower transaction volume. As far as the prices are concerned, there might be little move in the short term. I believe sellers will enter a wait-and-see mode and not very willing to cut prices at this juncture, and some buyers and speculators will give it a second thought as it will be harder to finance the transaction and they cannot get out of the market soon.

However, the root of the problem, namely, the currency peg, is not solved. Given the flood of money around the region, money will be staying around. Here we have high inflation expectation and low interest rates, so bulls still have plenty of reasons to stay bullish on Hong Kong property, as they would claim that real estate is a great store of value and hedge for inflation, that sort of thing.

It will not be surprising to see property stocks dropping next week, and in fact they have dropped a bit today. But over a medium term, this is actually rather tricky. If less money is going into Hong Kong Property market, where will the money go?

My answer: Hong Kong Stocks.

China

China just raise the reserve requirement ratio again by 50 basis points, just as the rumour suggested that they will do something today. Here I have very much expected more tightening down the road, so this is not very much unexpected, and I do not have anything else to say on this at this moment.

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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.