Hong Kong Plugs Property Tax Loophole Amid Home-Buying Spree

  • New rules intended to prevent multiple purchases of units
  • Analysts say move won’t have much impact on home prices

Hong Kong Plugs a Property Tax Loophole

Hong Kong’s government tightened property rules for the second time since November to shut a loophole that allowed investors to snap up multiple units in one shot to qualify for lower tax rates.

Under the new rules, first-time home buyers acquiring more than one property in a single contract will be charged the same 15 percent stamp duty that applies to purchases of a second property, rather than the 4.25 percent duty for first-time buyers. The change, announced late Tuesday by Hong Kong’s Chief Executive Leung Chun-ying, took effect at midnight.

"Though buying multiple flats in one contract accounts for a small proportion of residential apartment transactions, there’s a noticeable increasing trend,” Leung said at a briefing on Tuesday. “This doesn’t only go against the government’s goal to clamp down investor demand through the new stamp duty, it also fuels the property market sentiment.”

Hong Kong’s leaders are seeking to address a gap that allowed the richest buyers to take advantage of rules intended to help first-time home buyers, as they face rising discontent over wealth inequality and skyrocketing housing costs. The previous attempt to rein in the market in November did little to cool demand, with prices setting new records this year in the world’s least affordable market. People have also been able to find legal ways around the restrictions, with some purchasing several units at the same time so they could still qualify for lower tax rates.

“The new measure will make it fairer for buyers of a single property,” Willy Liu, a director at Ricacorp Properties Ltd., said in an email.

Little Impact

Liu and other analysts say the latest move will do little to cool prices in the housing market.

“The measure’s real impact on the housing market will likely be mild, if not negligible,” Alan Jin, Asia ex-Japan property analyst at Mizuho Securities Asia Ltd. in Hong Kong, wrote in a note. While the practice of buying multiple homes on one contract accounted for about 25 percent of sales in mid-March, the drop in demand from investors “can be easily made up for by real buyers,” he said.

The Hang Seng Property Index was mostly unchanged in Wednesday trading, edging up 0.2 percent at 10:30 a.m. in Hong Kong as investors have gotten used to the futility of such moves. Existing home prices have surged since the previous measures in November.

The move should help owner-occupiers, Raymond Cheng, property analyst at CIMB Securities Ltd. in Hong Kong, wrote in a note. “Many end-users complained that they didn’t have a chance to buy as developers gave priority for multi-unit buyers.”

Brisk Sales

CIMB forecasts primary market transaction volume will remain strong at 10 percent to 15 percent growth this year, while house prices will rise as much as 5 percent.

Existing home prices have climbed to fresh records, according to the Centaline Property Centa-City Leading Index. Even after the Federal Reserve raised interest rates, a move that presages higher mortgage rates, developers have seen brisk sales.

Cheung Kong Property Holdings Ltd. last week offered 40-square-meter flats in east Hong Kong island for at least HK$10.3 million ($1.33 million), Apple Daily reported. The amount could buy a two-bedroom, inner-city Sydney apartment with a car park, according to real estate website Domain.com.

Hong Kong’s de-facto central bank on Monday expressed concern about the riskiness of mortgages issued by developers with high loan-to-valuation ratios. The accumulation of these mortgages may change the risk-profile of developers to which banks may have exposure, said Raymond Chan, executive director for banking supervision at the HKMA.

The HKMA may ask banks to take additional steps to manage their exposure to the sector, Chan said.

Housing prices in Hong Kong are close to their peak and economically “unsustainable,” according to Cusson Leung, managing director at JPMorgan Chase & Co.’s Asia Pacific equity research unit.

Price increases in the city have outpaced economic growth “significantly” since 2009 and any external shocks could trigger tighter liquidity in the banking system, he said.

— With assistance by Daniela Wei, Emma Dong, Moxy Ying, Simon Lee, and Richard Frost

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