HK anti-foreigner property tax hits wrong target

October 25, 2013

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Hong Kong’s assault on foreign property speculators has hit the wrong target. It’s a year since the territory took aim at non-resident apartment buyers by forcing them to pay an extra 15 percent stamp duty. The drastic move has cooled demand for luxury flats and prompted investors from mainland China to look elsewhere. But the smaller flats that Hong Kong citizens care about most are still getting more expensive.

Though the “special stamp duty” still hasn’t received formal legislative approval, there’s little doubt it has discouraged foreigners from parking their spare cash in prime Hong Kong real estate. The average sale price of a large Hong Kong apartment – one with floor space of 100 square meters or more – is just 1 percent higher than a year ago. The number of transactions has halved over the same period, suggesting that sellers are being slow to adjust their prices. For the first time in years, big property developers are offering discounts on new luxury developments.

The tax also appears to have succeeded in diverting some of the Chinese money that was pouring into Hong Kong’s property market. Just over 6 percent of apartment buyers in the second quarter were from the mainland, according to data from property agency Centaline, down from 11 percent in the third quarter of last year. Anecdotal evidence suggests that the Chinese buyers have moved on to cities such as Sydney and London. House prices in central London were up 7 percent year on year in September, according to Knight Frank.

Yet while Hong Kong’s tax has successfully cooled demand at the top end of the market, it has had less impact on the smaller apartments that most ordinary Hong Kong citizens aspire to. Properties with floor space of less than 100 square meters were 10 percent more expensive in August than before the stamp duty was introduced.

The authorities have taken steps to increase supply by releasing more land for development. But it will take higher interest rates to prick the property bubble effectively. With its monetary policy effectively linked to that of the United States thanks to the long-standing currency peg, Hong Kong’s prospective homebuyers will have to wait for the U.S. Federal Reserve to help them instead.

 

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