Will Hong Kong’s tax tweaks end its real estate slump?
RESCUE measures intended to coax mainland Chinese to buy residential property in Hong Kong have failed to woo, as the financial hub’s property market slump deepens.
It comes six weeks after Hong Kong Chief Executive John Lee tweaked official housing policy, lowering purchase duties and weakening disincentives against quick resales.
“My WeChat has been buzzing with inquiries from (Hong Kong-based mainlanders) about the specific (changes), but not a single one is interested in viewing properties,” said a real estate agent surnamed Pan.
For the past five years, Pan has focused on so-called “Hong Kong drifters”, a mostly professional class who plan to be in the city long term and lack permanent residency but may be working towards it. Hong Kong is thought to be home to about 350,000 such people.
On Oct 25, Lee delivered his second Policy Address, an annual speech that sets the political agenda in the city. He adjusted a regime of property controls intended to keep a lid on prices that dates back to the global financial crisis. Two key stamp duties that previously added 30 per cent to a purchase price would be cut in half, he said.
Lee also beefed up talent incentives, announcing that certain professionals who move to Hong Kong would not need to pay stamp duty so long as they subsequently obtain Hong Kong permanent residency (HKPR).
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For long-term renters from the Chinese mainland, it should all have been good news. But Caixin has found that despite an uptick in the city’s new residential transactions, many still remain hesitant to buy.
“Mortgage rates are too high right now,” said Chen Yuan, a financial services professional who has worked in the city for six years. “There’s no good reason to take out a loan during a property market downturn.” Chen said turbulence in her industry, where her husband also works, was a key factor in their decision to put off buying a house.
Hong Kong’s property market continues to slump as rates rise and capital flees in search of safer investments such as fixed deposits.
The uncertainty has dented confidence as more potential buyers adopt a wait-and-see posture. A recent UBS report predicts the drop in property prices will reach 5 per cent this year and accelerate to 10 per cent in 2024.
Hong Kong’s property prices remain some of the world’s highest. They rose continuously, with occasional short-term corrections, from the global financial crisis of 2008 up until a historic annual decline in 2022. But the recent shift, and the absence of a sustained post-pandemic bounce, has many investors asking where the market is headed, and what a recovery will look like.
Less than expected
Lee’s changes announced in the Policy Address fell short of market expectations. “This is not even half of what was expected,” said Joseph Tsang, chairman of the Hong Kong branch of developer JLL.
“Over the past year, interest rates have risen significantly, various economies have shown moderated growth, and transactions of the local residential property market have declined alongside a downward adjustment of property prices,” Lee said in his address.
He said an expected increase in housing supply in the near term justified easing the measures intended to cool demand. Those measures include three taxes on property sales: the Special Stamp Duty (SSD), the Buyer’s Stamp Duty (BSD) and the New Residential Stamp Duty (NRSD).
Lee said that from Oct 25, buyers would only need to wait two years before reselling if they wanted to avoid an SSD of 10 per cent. Previously, homeowners were required to wait three years if they wanted to avoid the additional tax.
Long an attractive place for mainlanders to park their money and hedge against risks closer to home, Hong Kong’s speculative inbound capital had nonetheless come in waves.
A key instance was after the 2008 global financial crisis, when quantitative easing made the city’s property market an attractive proposition. The SSD was introduced in 2010 in part to combat that. The BSD followed in 2012 as a tax on purchases by non-HKPRs.
In his speech, Lee also announced that the BSD and NRSD would be cut in half to 7.5 per cent. The change was intended to ease the financial burden of housing purchases on HKPRs and non-HKPRs alike, he said.
Finally, a refundable upfront payment of the BSD and NRSD would be scrapped for “inbound talent”, meaning incoming professionals who eventually obtain HKPR. Lee said this was an “enhancement” of the refund arrangement, introduced last year, under which the cohort did have to pay the duties up front, but were entitled to a refund after they had lived in Hong Kong for seven years and obtained HKPR.
Rosanna Tang, executive director and Hong Kong head of research at Cushman & Wakefield, said the new stamp duty exemptions for incoming talent were in line with the government’s broader efforts to remove barriers for individuals interested in developing their careers in Hong Kong.
Market carnage
Last year Hong Kong’s pre-owned home price index fell 15.6 per cent, with transaction volumes falling nearly 40 per cent. Then, in the first four months of 2023, the property market experienced a rapid recovery after the border reopening with the mainland. From January to April, its pre-owned house prices rose for four consecutive months.
It would not last. According to data from Cushman & Wakefield, there were less than 9,200 housing sales in the third quarter of 2023, 25 per cent down on the prior quarter and 21 per cent down on the prior year.
Edgar Lai, a senior director of valuation and advisory at Cushman & Wakefield in Hong Kong, told the press that the third quarter, usually peak transaction season, was the worst he had seen in more than 20 years in the industry.
The strong stock market rebound at the end of 2022 also petered out. Hong Kong stocks have been haemorrhaging since then, disrupting the traditional investment approach of making money on the stock market and investing it in property.
Meanwhile, the continued rise in mortgage rates has discouraged potential homebuyers from entering the market. The US Federal Reserve began a round of successive interest rate hikes from near zero at the beginning in March 2022 to a range of 5.25 to 5.5 per cent in September this year.
Facing the high cost of funds, several major commercial banks in Hong Kong started to raise their prime lending rates for mortgage loans in September 2022. After the latest hike in July 2023, HSBC, Bank of China and Hang Seng Bank currently have a prime rate of 5.875 per cent, representing a cumulative increase of 0.875 of a percentage point. Smaller banks such as Bank of East Asia and Citibank have raised their prime rate to 6.125 per cent.
Meanwhile, Hong Kong’s tourism and retail sectors recovered less than expected following the city’s reopening. Locals cleared out in favour of tourist destinations abroad. Dampened by the sputtering Chinese economy, few inbound tourists replaced them. In the first eight months of 2023, only 20 million tourists visited Hong Kong, less than half as many as in the comparable period of 2018.
Sellers quick to offload
As US interest rates remain high, the interest on Hong Kong dollar fixed deposits continues to rise steadily. Major banks have all raised their three-month fixed deposit rates to 4.5 per cent, with some smaller banks offering more than 5 per cent interest on large fixed deposits.
Timed deposits, which tend to offer lower returns than stocks and bonds and lack flexibility, have become the de rigueur place to park cash from a housing sale.
Meanwhile developers are struggling with unsold inventory. According to data from Centaline Property Hong Kong, unsold inventory of new private residential properties surged to 20,483 units in the third quarter of 2023, reaching a near 20-year high.
Since the second half of this year, the market has seen a number of residential properties at lower prices. In early August, CK Asset Holding, the property flagship of Hong Kong billionaire Li Ka-shing, sold its Coast Line II project in Yau Tong at a discounted price, causing a stir in the primary market.
Road to recovery
In the weeks since the changes, the transaction volume of new residential properties has noticeably rebounded, but the downward trend in property prices continues.
Between Oct 25 and Nov 25, the transaction volume of new residential properties was up by around 2.8 times month-on-month, reaching 678 transactions, according to Centaline Property.
Meanwhile, an index for private flats from the Rating and Valuation Department fell by 2.2 per cent month-on-month in October, marking the sixth consecutive monthly decline.
While the uptick in new housing sales may be related to the policy changes, it could also be down to developers aggressively promoting the sale of new properties at low prices, analysts said.
Derek Chan, head of research at Ricacorp Properties, believes low-cost launches by primary developers will continue to put pressure on pre-owned home prices, he said.
He predicts that with a significant inventory of new residential properties, developers will continue to adopt a “quantity before price” strategy with low-priced launches in December. As a result, homeowners seeking to resell will need to do so at lower prices. He expects Hong Kong property prices to decline by 7 per cent for the full year.
Ken Yeung, head of property research at Citi in Hong Kong, predicted that an improvement in economic conditions and interest rate cuts next year could see Hong Kong property prices bottom out in the first half of 2025. CAIXIN GLOBAL
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