Stamp duty hike to have limited impact on HK property demand

November 08, 2016 10:21
Property buyers in Hong Kong will take higher stamp duty in their stride as investment appetite remains strong. Photo: HKEJ

Hong Kong government has raised the property stamp duty for the third time since 2010. Over the same period, the city's de facto central bank has tightened mortgage loan policies seven times.

All these moves notwithstanding, it is doubtful if home prices in Hong Kong can really be tamed.

Last Friday, Chief Executive Leung Chun-ying announced that the stamp duty on property transactions for non first-time buyers will be raised to 15 percent.

But the news appears to have been shrugged off by local as well as mainland investors, judging from the crowds that flocked to a housing project in the city on Sunday.

The reality is that the Hong Kong market is flush with liquidity and buyers can take higher duties in stride.

This is evident, for example, from the data related to registration taxes on new vehicles.  

The government has received up to HK$10.3 billion in registration taxes on new vehicles last year, showing that there are plenty of buyers who can tolerate high first registration taxes on new vehicles.

In a bid to encourage greater use of public transport, which will help alleviate traffic and pollution problems, authorities have been seeking to make it costlier for citizens to buy private cars.

In keeping with the goal, the government in 2011 announced a 15 percent hike in the rate of each tax band for the first registration tax for private cars.

Following the move, first registration tax on new vehicles went up to 40 percent from 35 percent on the first HK$150,000 of the taxable value of the cars. On the next HK$150,000, the rate was hiked to 75 percent from 65 percent.

On the next HK$200,000, the rate was increased to 100 percent from 85 percent. And for anything beyond HK$500,000, the rate was set at 115 percent, compared with 100 percent earlier. 

The registration tax is based on the retail price. Hence, luxury cars would especially cost a lot more by the time they fall into the hands of consumers.

The tough-handed tax on private cars worked for some time. Registrations of private cars were up only 1 percent to 44,983 units in the first year after the new tax took effect, compared with annual growth of 5 percent in the past.

However, the tax effect started to fade in subsequent years. The number of new registered private cars soared to 50,322 last year, the highest since 1997. The figure is 22 percent more than the 41,240 such registrations recorded in 2010 before the new tax measure.

Meanwhile, the government's first registration tax revenue from motor vehicles soared to HK$10.3 billion for 2015/2016, more than double from the HK$4.5 billion seen in 2010/2011. That shows that Hong Kong buyers are increasingly tolerant of high taxes.

Now, private cars are basically consumer goods without too much investment value. A new car would lose one third of the retail price once it's sold. And the resale value would continue to decline, along with increasing maintenance costs.

By contrast, properties can at least hold or even increase in value over time, and owners can let them out for rental income.

Hong Kong, like many other places in the world, has been seeing widening wealth gap among its citizens. The rich are becoming richer, and a hike in taxes doesn't bother them.

Meanwhile, the number of emerging wealthy Chinese on the mainland is so huge that even if a small fraction of them invest in Hong Kong, it amounts to a big boost to the city. Property investments remain a key focus area for many wealthy people from China who put their money in Hong Kong.

Given this situation, the rich investors won't be held back by the new stamp duty hike. Properties in Hong Kong are seen as good investments and a hedge against yuan weakness. Chinese investors, anyway, don't have too many other options as returns on bank deposits keep falling in the mainland.

Home prices in Hong Kong, for sure, are exorbitant and unaffordable for ordinary citizens. But for the rich, the segment remains one of the most favored asset classes. This is the reason why we can say that the latest stamp duty hike will have a limited impact on the property sector.

Generally speaking, policymakers are moving in the right direction in a bid to rein in property prices. The government has boosted the supply of public housing and subsidized flats and private housing units and sought to tamp down investment demand.

However, these measures will only go so far given the abundant liquidity in the market and the unending appetite of investors. 

This article appeared in the Hong Kong Economic Journal on Nov. 7 

Translation by Julie Zhu

[Chinese version中文版]

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Hong Kong Economic Journal columnist