Saturday, December 4, 2010

Special Stamp Duty signals the End of High-land-price Policy in HK

Starting from 20 November 2010, the Hong Kong Government has started charging an extra Special Stamp Duty (SSD) up to 15% for individual who resales any local property flat within a 2-year period.

This extraordinary measure is cooling down the Hong Kong property market as the short-team investment demands are now greatly reduced. The Hong Kong Financial Secretary John Tsang, in his remarks, said that the SSD is to reduce the risk of asset bubbles forming and to fight against the hot money impact of the US quantitative easing monetary policy.

The question is: why it happened, and why so suddenly?

The official answer is the Hong Kong Government has data showed that more and more speculators extended their target in recent months from luxury flats to cheaper flats, including starter flats for first-time buyers.

That was true but, we believe there had another important factor that initiated this policy change announced on 19 November 2010. Just 5 days prior to the announcement, China premier Wen Jiabao told Macau officials that high housing price is a major concern that affecting the livelihood of the population.

There is no reason that the same concern is not applicable to the neighborhood of Macau: Hong Kong, where its high-land-price policy obviously violated what the premier had said on 14 November 2010.

This explained why the Hong Kong property policy was changed so suddenly. Before that, the Hong Kong Government even criticized any extra stamp duty would be unfair to those who have genuine needs to sell their properties within the specified period of time, would cause additional hardship to those in financial difficulties, and would also amount to double taxation for those already subject to profits tax.

This latest policy did have a real and immediate impact on the market. The number of transactions in the secondary property market dropped 80% the first weekend after the SSD announcement.

We, Mr China, therefore decide that Hong Kong property-related stocks will not be our pick, at least in the year 2011. Quantitatively, we expect an average of -5% stock price correction for the property sector in 2011.

To ensure the healthy and sustainable development of the Hong Kong property market, however, Mr China is a supporter of this latest policy which can help reducing the risk of asset bubbles, protecting the Hong Kong banking system and thus reducing the possible risk of it ever needing a taxpayer-funded bailout.

We expect the latest policy will continue to reduce liquidity in the property market and will probably slow the surge in property prices, but should not cause a sharp correction (not likely more than 15% of course), as we see limited impact on the fundamental supply/demand conditions (actually both the supply and demand will decrease).

In reality, we do expect there will be an increased supply in rental market because the SSD encourages speculators to hold properties for over a 2-year period.

In the long term, the Hong Kong Government will have to guarantee an adequate supply of land and also to provide sufficient non-luxury starter flats for first-time buyers since the private market has only concentrated on supplying luxury flats in recent years.


In case you want to know more about the latest policy, here are the details (Source: Hong Kong Government):

An extra Special Stamp Duty (SSD) has been introduced, on top of the current property transaction stamp duty, for properties acquired on or after 20 November 2010 and resold within 2 years, as follows:

  • 15% if the property is resold within 6 months;
  • 10% if the property is resold after 6 months but within 1 year;
  • 5% if the property is resold after 1 year but within 2 years.

  • The Hong Kong Monetary Authority (HKMA) also issued on the same day a set of new guidelines to banks requiring them to further strengthen their risk management standards for mortgage lending business by adopting the following measures:

    (i) for residential properties valued at HKD$12 million or above, the maximum Loan to Value Ratio (LTV) for mortgage loans should be lowered from 60% to 50%;

    (ii) for residential properties valued at or above HKD$8 million and below HKD$12 million, the maximum LTV ratio should be lowered from 70% to 60%, but the maximum loan amount should be capped at HKD$6 million;

    (iii) for residential properties valued below HKD$8 million, the maximum LTV ratio should be maintained at 70%, but the maximum loan amount should be capped at HKD$4.8 million; and

    (iv) for all non-owner-occupied residential properties, all properties held by companies and all industrial/commercial properties, the maximum LTV ratio should be lowered to 50%, regardless of property values.


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