H.K. Imposes Property Tax on Non-Locals on Bubble Risks

Hong Kong Chief Executive Leung Chun-ying imposed the city’s first property tax targeted at overseas buyers as U.S. monetary easing and record-low interest rates boost the risk of a housing bubble.

Non-local and corporate buyers will have to pay a 15 percent tax upon purchase, Financial Secretary John Tsang told reporters at a press conference on Oct. 26. The government also raised a resale tax on property by about 5 percentage points and extended the period during which it will apply to three years from two.

Hong Kong is implementing its third set of property curbs in two months after home prices almost doubled over three years to become the world’s most expensive. The city’s de-facto central bank was forced to defend the currency’s peg to the U.S. dollar for the first time since 2009 this month as the Federal Reserve’s third round of quantitative easing sparked an inflow of cash into the city.

“These measures will be effective in reducing the number of transactions, but ineffective in curbing the property prices,” said Cusson Leung, a Hong Kong-based property analyst at Credit Suisse Group AG. “The non-local buyers’ stamp duty is more of a PR stunt as it responds to Hong Kong homebuyers’ demand to raise the barrier for foreign investors.”

Record low mortgage rates, an influx of buyers from other parts of China and a lack of new supply have been underpinning the Hong Kong property market, prompting Leung Chun-ying, who was sworn in as the city’s leader in July, to accelerate land sales and give preference to local buyers in some projects.

Residency Status

The new property tax doesn’t apply to Hong Kong permanent residents. Inhabitants need to live in the city for seven straight years to be eligible for permanent residency, according to immigration rules, while Chinese citizens born in the city are automatically granted that status.

Property owners who sell their homes within six months of their purchase will need to pay a 20 percent special stamp duty, up from 15 percent, Tsang said. For resale between seven months and 12 months, the duty will increase to 15 percent, and transactions between 13 months to 36 months, the duty will be 10 percent.

“The current housing supply lags behind the soaring demand; we need to work on the demand-side measures,” Tsang said. “These measures target specifically property investors who resell the flats within three years, but not the genuine end-users.”

Sales Forecasts

The measures will stabilize prices while reducing supply, Midland (1200) Holdings Ltd. Executive Director Vincent Chan said in a press statement released by the company on Oct. 27. Chan predicted new property transactions will fall to around 14,000 to 15,000 next year compared with earlier projections of 18,000. Second-hand transactions may drop to 63,000 from previous estimates of about 70,000, Chan said.

Sales of 12 used homes were recorded at the city’s 10 largest estates over the weekend, the lowest level in four months and down 43 percent from the previous weekend, Centaline Property Agency Ltd. said in an e-mailed statement yesterday.

The surge in Hong Kong’s property prices is out of sync with the economy where exports and retail sales have been declining, Tsang said.

“The low-interest rate environment will likely continue and Hong Kong property prices are likely to climb,” he said. “The property bubble is likely to increase the risks” to the economy and people’s livelihoods, he said.

The nine-member Hang Seng Property Index (HSP) has jumped 30 percent this year, driving the benchmark Hang Seng Index to the highest in more than 12 months this week.

Mortgage Tightening

Non-local buyers account for 19.5 percent of total sales of first-hand properties in Hong Kong in 2011 and 6.8 percent of total sales of second-hand properties in 2011, Tsang said.

Hong Kong joins Singapore in efforts to cool soaring property prices by targeting non-residents. Singapore in December imposed an additional 10 percent stamp duty on foreigners and corporate entities.

Hong Kong’s central bank tightened mortgage lending on Sept. 14 after saying the Fed’s latest quantitative easing risks pushing up home prices that have already surpassed their October 1997 peak. That marked the start of a 70 percent decline to August 2003, according to an index compiled by Centaline. They have soared more than 240 percent since that trough nine years ago.

Leung said on Sept. 6 he will restrict homebuyers of two building sites the government plans to sell to local residents, a week after announcing a 10-point package to rein in prices including making more land available to developers and speeding up the building of public housing.

Chinese Buyers

Hong Kong home prices have risen 18 percent this year, according to the Centaline index. They fell 4 percent in the last three months of 2011, the biggest quarterly drop since the global credit crisis, after mortgage restrictions and as China’s economy began to slow.

Buyers from other parts of China made up 36.8 percent of all new sales by value in the first quarter, down from 37.9 percent in the previous three months, according to Midland. The proportion reached 53.9 percent in the third quarter last year, the realtor said.

The city’s home prices are 65 percent higher than Tokyo’s, the world’s second-priciest place to buy a home, according to a study by Savills Plc (SVS) published last September that compares prices in 10 global cities including New York and London.

The number of home transactions in Hong Kong rose 42 percent in August from a month earlier, the biggest increase since March.

To contact the reporter on this story: Vinicy Chan in Hong Kong at vchan91@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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