What is the reasoning behind the massive hike in stamp duty in the world’s hottest real estate market?
Three years ago the stamp duty paid by property purchasers in Hong Kong rose from 4.25 per cent to 8.5 per cent for residents where the amount or value of the consideration exceeded HK$2 million. For foreign buyers, the stamp duty was set at 15 per cent.
In November 2016, the rate for all second-home buyers, private or corporate, shot up to 15 per cent, irrespective of the amount or value of the consideration. Only first-home-buying permanent residents of Hong Kong can avoid the increased charge.
It’s a tax that makes sense in what is broadly agreed to be the world’s least affordable city. Sydney and Vancouver, the other two real estate hotspots, have got nothing on Hong Kong, where residential home prices have more than quadrupled in the last two decades.
Making housing more affordable
The dramatic rise in stamp duty is partly intended to play a role in cooling the market and making life more affordable for the city’s residents, hence the increase in stamp duty for all and not just for foreign buyers. However, it has another important purpose – to keep investment dollars in mainland China.
“Since the middle of this year the stamp duty rise has been on the cards because there has been an anticipation of softening property prices in mainland China,” says Vic Edwards, professor of economics and finance at the China Youth University of Political Studies in Beijing and visiting fellow at the Australian School of Business, University of New South Wales.
“What they wanted to prevent was a sudden flood of Chinese investors buying properties in Hong Kong,” Edwards explains.
The dramatic rise in stamp duty is partly intended to play a role in cooling the market and making life more affordable for the city’s residents.
Since July 2015, as the mainland economy showed signs of cooling and the Chinese share market experienced a series of wild swings, investors began to look elsewhere for reliable growth. Property was the obvious choice. Buyers naturally tend to look into markets they understand, so they turned their attention to the hottest real estate market in the world, Hong Kong.
Related: Why do house prices keep rising in countries like Australia and Singapore?
Edwards says that around 20 per cent of property purchases in Hong Kong in 2016 have been by mainland Chinese buyers. In anticipation of softening property prices in mainland China in 2017, this percentage is only expected to rise, he says. This led to the lift in Hong Kong stamp duty.
“The wealth is quite evident. It is a very, very affluent society at the moment and that’s very new to China. The wealthy are now in a situation where they’re wanting to make investments all around the world.”
In early 2016 Chinese property portal Juwai nominated the USA, Australia and Canada as the top countries for Chinese buyers searching for property in 2015.
Australia raises levies on foreign buyers
Hong Kong is not alone in introducing or raising levies on foreign home buyers. This year several Australian states imposed or raised the extra levy they charge foreign buyers on top of the existing duty on residential property.
Queensland introduced an extra 3 per cent duty payable by foreigners buying residential land, effective from October 2016.
New South Wales added a 4 per cent additional duty from June and Victoria raised its additional duty on foreign buyers from 3 per cent to 7 per cent from July 2016.
Related: Which countries are investing the most in Australia?
Investment into the USA remains popular, says Edwards. Chinese began investing in US properties after the global financial crisis hit.
“Some very good properties had their prices halved so they bought them and have done very well,” adds Edwards.
Canadians act to cool the Vancouver property market
The Vancouver real estate market has seen values double in the last decade and in July the government of British Columbia approved a new 15 per cent tax on foreign property buyers in metropolitan Vancouver, in an attempt to cool the raging market.
A report from RBC Economics in mid-September said the Vancouver property tax created a “marked acceleration of the decline in home resales in the Vancouver-area market. Resales plummeted by 18.8 per cent month-on-month in August (on a seasonally-adjusted basis) in the area, following a 9.3 per cent drop in July.”
Evidence suggests such an action can be effective in slowing price growth in the short-term. According to a Bloomberg report, values of residential real estate in Singapore have fallen 10 per cent since early 2013 when stamp duty was raised to 15 per cent.
Of course, there have been other, unique factors at work, including regulatory changes and greater supply (a luxury that Hong Kong is less likely to be able to afford its residents), but the rise in stamp duty was clearly responsible for some of the cooling in the market.
Should we expect the same effect in Hong Kong? Only time will tell, Edwards says.
“At best it has already taken some of the heat out of the Hong Kong market,” he says.
“I also think some of the local people are not too happy about that, particularly if they already own property. Even for the younger residents, who wouldn’t have paid a high level of stamp duty on their first purchase, it takes away some of the asset value.”
Will a property tax cool demand?
Jonathan Gordon, Hong Kong-based distribution director for property investment advisor IP Global Ltd, says he expects the tax to cool local demand but perhaps not have the desired effect on foreign purchases in Hong Kong.
“This rise in stamp duty is the most recent of the cooling measures introduced by the Hong Kong government to curb the housing market, which has performed strongly since the [Northern] summer,” he says.
"The decision will not necessarily impact demand from abroad, where buyers tend to be more motivated." Jonathan Gordon IP Global Ltd
“Transactions are on the rise again, and although historically this has been driven by the primary market, secondary purchases are having a bigger and bigger effect.”
However, Gordon says the decision will not necessarily impact demand from abroad, where buyers tend to be more motivated and will have greater tolerance for another large cost in addition to those they already accept.
He believes the rise will be more likely to calm domestic demand.
From the Australian perspective, Australian expats in Hong Kong who previously might have looked to invest in the city’s property market are now more likely to focus on the Australian market, says Adler Ho, founder and managing director of Adler Ho Property Consultants.
“Expats that were potentially looking to invest further in Hong Kong are now looking to place that money back in Sydney,” Ho says.
“This is driven in part by increased costs in Hong Kong, but also as the general financial industry in Hong Kong seems to be consolidating and many expats are looking at the possibility of moving back to Australia in future years, it makes sense for them to look at buying a future home while the exchange rate is favourable.”
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