Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Is a market with hardly any liquidity a market? Look at property in Hong Kong, where housing is the least affordable in the world and prices keep climbing in the face of official curbs.

Up and Away
Hong Kong home prices have paused in the past month but have been climbing for more than 10 years
Source: Centaline Property
Note: Prices reflect secondary purchases.

There's very little buying and selling of old homes in the territory. Painful loan-to-value rules mean second-time buyers of property valued at more than HK$10 million ($1.3 million) -- just enough to bag an apartment of less than 500 square feet in Central District -- can only borrow a maximum of 40 percent; it's 50 percent for transactions below that level.

An increase in stamp duty last November set the transaction tax at 15 percent of the cost of a resold home for permanent residents, and double that for foreigners (mostly those from mainland China). According to JLL, as Jones Lang LaSalle Inc. is known, transaction volumes in the secondary market have fallen by about 70 percent between 2010, when the government first began suppressing demand through higher stamp duties, and June 30 this year.

Not for Sale
Secondary home sales have been falling since 2010, when the government started raising taxes
Sources: Midland Property, Bloomberg Intelligence

The tax measures have created a lopsided structure where all the activity is in new homes. Increasing their supply might help ease prices overall. Despite a large public housing program, the wait for a home through the government can stretch to more than three years.

One solution would be to release farmland hoarded by big developers like Henderson Land Development Co. The company owns 45 million square feet of agricultural land in the territory, the most of any developer, according to Patrick Wong of Bloomberg Intelligence. Henderson is in talks with the government to convert some of that to residential use.

With money so cheap, though, increasing the supply of homes will have a limited impact. Flush with liquidity, banks have barely increased mortgage costs even as the Hong Kong Monetary Authority mirrors Federal Reserve rate increases. (The Hong Kong dollar is pegged to the U.S. currency.) A 25-year mortgage is available for as little as an initial 1.7 percent.

Then there are developer freebies: Sun Hung Kai Properties Ltd. and Li Ka-shing's Cheung Kong Property Holdings Ltd. have been happy to dole out loans to top up bank funding for new apartments. With nobody regulating the developers, the HKMA's efforts to control banks' ability to lend have had little effect. Compare that with Singapore, which cracked down on developer giveaways.

In contrast, it's the government in China that has let some air out of the market. Limits on capital outflows helped ease price surges in the so-called super-luxury market for apartments costing more than HK$50 million each, a niche dominated by mainland Chinese, according to Wong. The Beijing clampdown also stopped a surge in Hong Kong land prices caused by successive record bids from Chinese firms like HNA Group Co.

Rationally, falling secondary volumes should hurt prices. But as JLL's head of research Denis Ma notes, there's little incentive to sell a property that's essentially paying for itself. A landlord can achieve rental yields around 25 basis points above the cost of borrowing.

Hong Kong needs to go further than increasing supply, boosting mortgage rates and trying to limit developer handouts. Here's an idea -- scrap the higher stamp duties that choked liquidity and gave pricing power to a small pool of new homes. Perhaps then, sanity will return.

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

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

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