Hong Kong property shares fell the most in seven months after the government imposed a tax on overseas homebuyers to deter capital inflows and reduce the risk of a bubble in the world’s most expensive housing market.
Sun Hung Kai Properties Ltd., the world’s biggest developer by market value, fell 5.1 percent at the close in Hong Kong and Cheung Kong (Holdings) Ltd. slumped 4.7 percent, while realtor Midland Holdings Ltd. plunged 15 percent. The nine-member Hang Seng Property Index fell 3.7 percent, the most since March.
The property gauge had jumped 30 percent this year before today, almost double the gain in the broader Hang Seng Index, as record-low interest rates and inflows spurred by U.S. monetary easing drove home prices to a record. Hong Kong Chief Executive Leung Chun-ying is implementing his third set of property curbs in two months, after tightening mortgage requirements and boosting the supply of land for developers as the boom triggered protests over a widening wealth gap.
“There’re a lot of worried investors out there,” said Adrian Ngan, a Hong Kong-based analyst at Citic Securities International Co. “Some worry that if these measures work, they’ll hurt property sales. Some worry that if they don’t work, it’ll prompt more measures from the government.”
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.
New World Development Co., the best performer in the property index this year, dropped 6.4 percent.
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, who was sworn in as the city’s leader in July, to accelerate land sales and give preference to local buyers in some projects.
The 15 percent tax “will be effective in curbing foreign demand - mostly from mainland buyers - and avoiding ‘hot money’ influx into the property market,” Alfred Lau, a Hong Kong-based analyst at Bocom International Holdings Co., wrote in a report today. “However, local demand is not affected.”
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.”
The measures will stabilize prices while reducing supply, Midland’s 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.
Today’s loss cut the gain in the Hang Seng Property Index this year to 25 percent. The benchmark Hang Seng Index has risen 17 percent this year.
“It’s time to sell” property stocks, Andrew Lawrence, Hong Kong-based analyst at Barclays Plc, wrote in an Oct. 27 report after the announcement. “The government has finally become serious about demand-side measures.”
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.
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 31.2 percent of all new sales by value in the third quarter, down 19.8 percentage points from a year ago, according to Centaline. The proportion reached 53.9 percent in the third quarter last year, according to Midland.
“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.”
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 published last September that compares prices in 10 global cities including New York and London.
The number of home transactions in Hong Kong fell 9.7 percent in September from a month earlier, according to Land Registry figures. In August, they jumped 42 percent from July, the biggest increase since March.