Real Estate

Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

When pro-market authorities tamper with prices to cool asset bubbles, economists speak of "throwing sand in the wheels of finance." Having emptied its bucket of sand without stanching the desire to own property, Hong Kong decided to derail the out-of-control streetcar in a pit of exorbitant taxation. Considering the more painful alternative, it's a wise move.

Iceberg, Right Ahead
Singapore's property price curbs have worked, while Hong Kong's haven't, forcing the Chinese territory to introduce stamp duties as high as 30%
Sources: Singapore Urban Redevelopment Authority, Centaline

Now that foreigners, including all-important mainland Chinese buyers, must pay a 30 percent stamp duty to buy overpriced shoeboxes, transactions could drop by 70 percent, Bloomberg News reported. Weaker demand might jolt earnings of the city's developers. That's what the biggest drop in 16 months in Cheung Kong Property Holdings Ltd.'s shares suggested Monday.

A more violent reaction, which might have occurred as Hong Kong's U.S.-linked interest rates rose, may have been avoided.

As Gadfly pointed out, Hong Kong property has been a magnet for the kind of speculative frenzy that Singapore managed to tame. A gush of money out of the People's Republic and into something -- anything -- in Hong Kong is the main reason a skilled worker in the territory was being asked to hand over seven years' more wages than his Singapore counterpart to own the roof over his head.

Even as Hong Kong's pro-democracy activists are ticked off by Beijing for trying to chart an independent political course, the city can exert more control over its economic destiny by making the world's least affordable housing a little less so. Not only will the 30 percent tax dissuade mainland buyers, it also could also put an end to speculative land purchases by Chinese developers.

According to Bloomberg Intelligence analysts Patrick Wong and Mohsen Crofts, the Chinese builders' bids may be a signal of capital flight: The HK$13,500 ($1,740) per square foot China's HNA Group Co. paid for a residential parcel is more than double what a nearby site cost in February 2014. Breaking even on land purchases at that level would require a 28 percent increase in apartment prices from just two months ago. And Hong Kong property prices have almost quadrupled since the end of the 2003 SARS outbreak.

All this madness should now end. With the island's property no longer as welcoming a receptacle for Chinese flows, expect more mainland money to chase Hong Kong stocks such as HSBC Holdings Plc, whose 6.8 percent dividend yield comfortably exceeds what a mainland landlord can hope to earn from an apartment in the city.

A Costly Win
Hong Kong developers have lured buyers with rebates, but more discounts will mean a margin squeeze
Source: Bloomberg

There's more potential good news for banks. If developers are forced to extend rebates to clear inventory, mortgage demand may hold up. First-time home buyers among permanent residents will pay a maximum levy of 4.25 percent, and may be lured to cheaper launches. That would help HSBC, Standard Chartered Plc, BOC Hong Kong (Holdings) Ltd. and Bank of East Asia Ltd. Hong Kong home loans have been a coveted island of profitability in a low-yield world, but competition for market share has lately put pressure on mortgage spreads.

An uncontrolled boom turning into a bust would have meant higher credit costs had to be borne out of declining returns. Hong Kong didn't just rescue its property market, it may have also saved the banks -- from themselves.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Compared with about 19 percent now.

To contact the author of this story:
Andy Mukherjee in Singapore at amukherjee@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net