Move may drive speculators to target lower end of property market

Hong Kong raised taxes on luxury homes for the first time in more than a decade, a move some analysts said may backfire by fuelling speculation in the cheaper housing market.

Stamp duty on sales of more than HK$20 million (S$3.6 million) will rise to 4.25 per cent from 3.75 per cent from April 1, Financial Secretary John Tsang said yesterday in his Budget speech, citing the increased risk of a property bubble.

For people buying their own homes ‘there might be some impact, but it shouldn’t be that big,’ said Buggle Lau, chief property analyst at realty company Midland Holdings Ltd. ‘For speculators, the cost of speculation increases, so they may shift their target to the lower end of the property market.’

The lowest mortgage rates in at least two decades and an influx of overseas capital equivalent to more than a third of Hong Kong’s annual gross domestic product helped fuel a 29 per cent gain in property prices last year.

The government is concerned at the risk to the economy should interest rates rise and will move to limit speculation if it spreads, Mr Tsang said.

‘If there’s a reappearance of speculation, we will act quickly with measures to cool down the market,’ Mr Tsang told reporters yesterday. While ‘it’s easy for the government to roll out some measures pushing home prices down, it’s difficult to push them back up. We won’t act recklessly.’

The new transaction tax on luxury homes, the first increase since 1999, will only affect about 2 per cent of the property market. Of 110,000 Hong Kong residential sales in 2009, about 2,000 sold for more than HK$20 million, according to Midland.

‘It will have a 0.01 per cent impact because they raised the stamp duty by half a percent on properties accounting for 2 per cent of the total market,’ said Nicole Wong, a Hong Kong- based real estate analyst at CLSA Asia-Pacific Markets, the regional brokerage unit of Credit Agricole SA. ‘What they announced today is only paying lip service. It will have almost no impact because there is no sign of determination.’

Mr Tsang said the government will also seek to address the supply of land for development by putting more residential sites up for auction.

The change in auction policy could also have an unintended effect as prices ‘in bull markets become signposts’, said Ms Wong. ‘More auctions more frequently could even fuel the property market further.’

In Hong Kong, the primary source of land available to property developers is through government auctions. The operator of the city’s Mass Transit Railway, the MTR Corp, and the Urban Renewal Authority also put sites up for tender.

Under the current system for government auctions, developers must indicate interest in a site on a government list. Once a ‘trigger price’ has been met, the land is auctioned. Mr Tsang said the government would now put sites up for sale at its own discretion.

He said the government will also ensure an increase in the supply of small and medium-sized flats by imposing conditions of future land sales. The government held the first land auction of 2010 on Feb 22.

‘Overall the government wants to increase the land supply,’ said Midland’s Mr Lau, who noted there were only two auctions last year. ‘In the past the land bank replenishment pace has not been very fast.’

Luxury property prices, for which there is no official index, may have risen as much as 40 per cent last year, Ms Wong said. Buyers of luxury homes were undeterred by an October increase in downpayment requirements from 30 per cent to 40 per cent.

Since the fourth quarter of 2008, HK$640 billion of capital had flowed into Hong Kong’s HK$215 billion economy, Mr Tsang said.

Sun Hung Kai Properties Ltd, the world’s biggest developer by market value, reported selling 900 homes in the suburban Yuen Long area for HK$4.2 billion on Feb 20 and 21, or an average of HK$5,400 per square foot. That compared with HK$3,000 in the same area a year ago, Centaline Property Agency Ltd said.

‘The increased risk of a bubble forming in the property market has also aroused public concern about the difficulty in buying homes,’ Mr Tsang said.

Shares of real estate developers gained after the speech, with Sun Hung Kai adding 1.5 per cent to HK$107.20 at the close of trading and Sino Land Co. up 1 per cent at HK$13.92. The Hang Seng Property Index was the only one of the four industry groups on the benchmark gauge to rise.

The stocks gained because ‘there is nothing too radical on property’ in the Budget, said Andrew Sullivan, a sales trader at Mainfirst Securities Hong Kong Ltd.

Source: Business Times, 25 Feb 2010