What you need to know about Hong Kong's move to curb the property market

Sales of luxury projects will be hurt.

According to Barclays, the government has announced two new measures to curb the property market. As expected, it raised the rate on the Special Stamp Duty (SSD) by 5% and extended its term to three years from two, and in a surprising policy move, it has (finally) introduced a flat-rate buyers’ tax of 15% for non-permanent residents (PR) and non-local companies.

Here's more from Barclays:

The 15% flat rate tax on non-PR residents and foreign companies largely targets mainland property buying activity and will have a negative effect on the sales of developers’ luxury projects in particular, in our view.

According to Centaline, mainland buyers accounted for 11.6% of total market transactions and 18.8% by value over the past year. Broken down by market segment, mainland buyers were a larger part of primary sales volumes, accounting for 26.7% of all primary transactions, and at 34.7% of developers’ sales by revenue focused on the more luxury end of the market. In the secondary market, mainland buyers were 8.5% of transactions and 11.5% in value over the past 12 months.

While we consider mainland buying data from local property brokers as overstated, collected simply based on the name of the buyer and, therefore, including mainland buyers who are already living in Hong Kong, the PR requirement (seven-year residency) is likely to mean that the many mainland buyers now fall under this foreign buyers’ tax. 

Although the data is limited (by length and quality) it is fair to assume that the positive correlation between buying volumes and property prices means that much of the mainland demand is for investment purposes. Having gone to the trouble of getting their money out of China, it is unlikely that such ‘wealth protectors’ would be happy to see its value destroyed.

The prospect of a 20% entry cost into the Hong Kong housing market - a 15% foreign buyers’ tax, plus the typical buying cost of 5%, made up of luxury property stamp duty and fees, plus the 3-year effective holding period under the SSD - makes a positive return clearly harder to assume.

As a result, the falling attractiveness of Hong Kong’s housing market for Chinese ‘wealth protectors’ is likely to mean a material slowdown in buying activity. This does not mean that mainland money outflows will necessarily slow, as these measures simply return Hong Kong to its traditional economic role of re-exporting whatever China makes, which, at this time, is money. (The ‘G4’ of the global housing market – Australia, Canada, US and the UK – are likely to be the main export destinations of choice).

This foreign buyers’ tax should not, however, only be seen as having an impact on foreign demand. There has always been an implicit message from property agents that Hong Kong buyers need to buy ahead of mainland money flows, restricting those flows is therefore likely have an impact on local buying sentiment, even if, due to recent anti-mainland feelings, these measures are domestically popular.

In the short term, the developers most likely to be impacted are those with a focus on luxury residential developments, such as Sino and SHKP which have focused on the upper-end of the housing market. Wharf and Wheelock, given their peak property portfolio, Swire with its luxury-end residential development strategy, Hang Lung Properties and its West Kowloon Harbour Side inventory, a location of strong mainland demand, and Kerry Properties with its luxury residential investment portfolio, will also be negatively impacted. The least affected developer will be Cheung Kong, in our view, given its mass-market focus.

The increase in the SSD rate and the extension of its duration were largely expected. The SSD will now last for three years with a 20% tax for anyone who sells within 6 months of buying, 15% for anyone who sells in the following six months and 10% thereafter for the following two years.

The last SSD proved effective at removing short-term traders from the market, but did little to offset the flow of investment money into the market to drive prices higher. With the Centaline property price index up 16.1% year-to-date, price momentum continues to outstrip the potential 10% cost of the SSD in 12 months from now, suggesting that these higher rates may still be insufficient to entirely stop investment flows into the housing market; a slowdown is, however, likely.

For the moment, the relatively low primary supply and the lack of secondary supply in the market are likely to act as near-term support. With little funding pressure on existing owners and few alternatives for investment, many homeowners will simply pay down their mortgage debt and not sell. In addition, if sentiment turns negative homeowners are often much quicker to withdraw property from the market, as we saw in 2H11.

In the short term, therefore, the biggest impact of these measures will likely be seen in declining sales volumes rather than in any significant price correction. Much of the near-term property launches by developers are at the lower end of the housing market and not the typical product demanded by mainland buyers.

Slower volumes will be particularly negative for Midland Realty, while its strategy to rely on primary sales that provide higher commission rates will also likely be impacted. It will also likely be negative for Hong Kong banks, whose mortgage lending growth, as shown in the September lending data, will slow further.