Social costs of property price curbs are unaffordably high
Updated: 2013-05-21 06:59
By Ho Lok-sang(HK Edition)
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Following Singapore's example, the Hong Kong SAR government started imposing a Special Stamp Duty (SSD) in September 2010. Initially SSD was charged as a levy of 5 percent to 15 percent on the resale price of residential property, depending on whether the resale was within the first or second year. Resales of units beyond the first two years were exempt. On Oct 26, 2012 the government announced, however, that SSD would be raised from 10 percent to 20 percent, and that housing units must be held for more than three years before being exempt from the SSD. Simultaneously, the government said it would levy a Buyer's Stamp Duty (BSD) at 15 percent on all purchases by non-Hong Kong residents and on corporations. Then on Feb 22 yet another severe measure was introduced. Regular stamp duties were doubled for any buyer other than a first-time home buyer or a homebuyer trading up and reselling his former unit.
The SAR government justified these "unusually severe measures" as being necessary in order to meet the needs of "unusually severe times". This article will analyze the results and implications of the measures.
The three extra stamp duties - SSD, BSD, and Double Stamp Duty - are aimed at reducing home prices and improving their affordability. In terms of reducing the price of homes, the effects should be clear; home prices will indeed be reduced. Given that in the short term, the supply of homes can be considered fixed, economics tells us that the market price will be what clears the market, or in other words, "what the market can carry". Since what the market can carry reflects the willingness of buyers to pay, to the extent that the stamp duties reflect a cost, the net price that buyers will pay will be the former price minus the expected stamp duty that must be paid. So, economics tells us that the price will be lowered by exactly the expected cost of the stamp duties.
But will the decrease in price caused by the three stamp duties actually improve the affordability of homes to homebuyers? The answer is positive. To the extent that speculative demand and investor demand are both reduced, and that overseas demand is also reduced, the price to be paid by homebuyers will indeed be reduced.
The increase in mortgage rates, which was engineered by the Hong Kong Monetary Authority, however, will not improve affordability at all. Any reduction in home price is entirely offset by the expected increase in interest payments.
Even though the "3D's" are all effective in reducing home prices and improving affordability, the social costs are too high. Here is why.
First is unfairness. I have previously argued that SSD is unfair to unfortunate people who have to sell their homes within the SSD-payable period. These unfortunate people could be in financial dire straits, but they have to bear the brunt of the tax through no fault of their own. Apart from the unfortunate ones who have to resell their units for one reason or another, people who work as brokers in the property agency business are suffering grave losses because the measures effectively destroy their livelihood. Transaction volume has declined dramatically to historical lows - even beating the record lows of the SARS period. From what we know, the main sellers of units were low-income homeowners in Kingswood Villas in Tin Shui Wai. Many of these sellers were selling at a loss.
Second is the potential risk of creating negative equity among homeowners. The 3D measures have effectively driven away speculators, investors, and even homebuyers who had wanted to trade up. Since trading up is never necessary and given that reselling a unit is so difficult, the likelihood is that homeowners would prefer to stay put. If only first-time buyers are left in the market, and they are buying with small down-payments, there will be considerable risk of them becoming negative-equity owners at the end of the day, when home prices continue to decline.
Third is damage to the economy. In a market that is almost entirely dependent on first-time homebuyers, home prices would inevitably decline. When home prices and volume decline investors will stay on the sidelines and the likelihood is that the declines will continue. A capital flight will follow, eroding the strength of the economy, and the revenue base of the government. I can safely predict that the government will run a sizable deficit in the current fiscal year.
The author is director of the Center for Public Policy Studies, at Lingnan University.
(HK Edition 05/21/2013 page1)