17 July 2019
Supply-demand imbalance is at the root of Hong Kong's housing woes, and there are no quick fixes. Photo: HKEJ
Supply-demand imbalance is at the root of Hong Kong's housing woes, and there are no quick fixes. Photo: HKEJ

Why home purchase restrictions won’t work in Hong Kong

Hong Kong’s home prices have risen for 25 straight months. The private home price index has soared 38 percent to 375.9 points as of May from 273.1 points in April 2016, according to data from the Ratings and Valuation Department. The index has set new highs for 18 months in a row.

Lee Wai-king, chairwoman of the Democratic Alliance for the Betterment and Progress of Hong Kong, has suggested that the government introduce home purchase restrictions. Financial Secretary Paul Chan Mo-po did not respond to that proposal.

China has tried such measures and they proved to be ineffective in reining in home prices.

Mainland authorities introduced home purchase restrictions in first-tier cities like Shanghai and Beijing in 2010. The policy was later extended to almost all second and third-tier cities. But over the years, home prices in the country kept surging.

Although purchase restrictions depressed demand in the short term, such rules cannot do anything to redress the supply-demand imbalance, which is at the root of the surge in home prices.

In the end, home prices kept rising, sometimes at an even faster pace.

Currently, Hong Kong’s double-stamp-duty (DSD) levies an extra 15 percent tax on home owners who already hold at least one property.

Although there is no restriction on home purchases, the tax rule has effectively imposed a penalty on buyers.

Around 8,000 home transactions paid DSD last year, which represents 13 percent of all residential property transactions.

That means nearly 90 percent of home buyers are first-time buyers. There is hence little meaning to introduce purchase restriction in Hong Kong, not to mention that such rules has proved to be useless in China.

Last year, China switched to another approach — price cap.

Authorities would impose a price ceiling for all new property projects, and forced property developers to accept such price if they want to get the sales permit.

This measure has enabled the government to directly control new-home prices and hence influence the expectations for the secondary market.

It’s estimated that the average home price in China’s big cities has fallen 10 percent on average since last year.

However, price caps have also led to some unexpected consequences.

For example, many new-home projects are sold at 20 or 30 percent cheaper rates than similar properties in the secondary home market.

That has drawn a large crowd to new-home projects. Some developers have to use a lottery system.

The price cap rule also leads to other problems. In one case, some 35 public servants in Xi’an reportedly sought preferential treatment from a developer in order to secure an allotment and profit from the price gap.

Perhaps what Hong Kong government can do is to consider hiking the buyer-stamp-duty (BSD) and DSD rate to 50 percent or even higher to cool demand from local and foreign buyers.

Also, the government should consider introducing tax on idle properties. That would buy some time for the government to ramp up supply.

This article appeared in the Hong Kong Economic Journal on June 5

Translation by Julie Zhu

[Chinese version 中文版]

– Contact us at [email protected]


Hong Kong Economic Journal columnist

EJI Weekly Newsletter

Please click here to unsubscribe