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News Release

Hong Kong

Restrictive Measures Fail to Address Root Causes of Rising Prices in the Hong Kong Housing Market

Jones Lang LaSalle Report: Government policies compounding problems by reducing supply in the secondary market

HONG KONG, 20 June 2013 – The Government’s restrictive property measures have had a notable impact on transaction volumes but have had little effect on curbing price increases or addressing the shortage of supply in the residential property market, according to Jones Lang LaSalle’s latest report on the impact of the restrictive policies.

The report also raises questions about the effectiveness and unintended outcomes of the restrictive measures, and offers some alternative arrangements that could potentially better achieve the objective of boosting property supply.
According to the report, Hong Kong’s residential property prices have more than doubled in the four years after hitting bottom in the wake of the Global Financial Crisis, climbing to all-time highs during the period. The drastic increase in prices was largely driven by a surge in capital inflow resulting from the ultra-low interest rate policies of central banks as well as an acute shortage of supply in the property market.
The supply of private housing has plunged by more than 50% over the past decade from an average of 27,000 units per year from 1990 to 2003, to an average of only 13,300 units per year from 2004 to 2012. The drop in housing supply was driven by a combination of a limited development pipeline in the post-SARS recovery and changes to the government land sale program; most notably the suspension of all scheduled land sales in 2003, and the reintroduction of the Application List land sale programme in 2004.
The announcement of restrictive measures, which were initially aimed at supressing investor demand in the residential property market have also resulted in an obvious contraction in transaction volumes in the secondary market. Measures such as increasing the stamp duty rate, stress testing Debt-to-Service (“DSR”) ratios, tightening mortgage lending, and lowering Loan-to-Value (LTV) ratios have stymied buying demand in the market by raising transaction costs. At the same time, these measures, which make it more costly for sellers to re-enter the market, along with the introduction of the Special Stamp Duty (“SSD”), has discouraged owners from selling their properties.
With fewer units being put up for sale in the secondary market, monthly transaction volume in the secondary market has fallen by over 55% since LTV ratios were further tightened and the announcement of the SSD in November 2010. In this regard, the current restrictive measures have actually exacerbated rather than alleviated the shortage of supply in the market, which Jones Lang LaSalle believes is one of the root causes of the rising prices in the housing market.
Jones Lang LaSalle also believes that some of the unintended outcomes arising from the restrictive policy measures unfairly affect legitimate end-users and does little to support first-time homebuyers. The DSD on non-residential property transactions, for example, has been widely criticised for unfairly taxing companies seeking to buy their own offices in the city for long-term self-occupation while the lowering of LTV ratios and introduction of the SSD has led to a crowding of demand in the mass residential market, which makes it harder for first-time homebuyers to enter the market, and potentially accentuates any losses incurred by owners who are forced to sell their property in the first three years after purchase.

Given the possibility of a stronger US dollar, Jones Lang LaSalle holds the view that Hong Kong’s housing prices are already at or near their peak levels. The assumption that the US Federal Reserve will end its quantitative easing programme in the near future has driven up long term interest rates, indicating that the US dollar is likely to be on the verge of a cyclical uptrend; historically, the bottom of the dollar cycle corresponded to peaks in Hong Kong’s housing market.
Mr Joseph Tsang, Managing Director for Jones Lang LaSalle Hong Kong commented, “The Government should rethink the effectiveness and impact of the current restrictive measures. Although these measures have been able to suppress demand, they have also accentuated the supply shortage problem in the market. We urge the Government to consider replacing the Special Stamp Duty (“SSD”) with a capital gains tax, which would help improve supply in the secondary market as well and limit the losses incurred by owners who are forced to sell their property at a discount yet continue to discourage speculation in the market. The government should also rescind other measures such as the Double Stamp Duty (“DSD”) and Stress Testing of Debt-Servicing-Ratios (“DSRs”) since the lower LTV ratios that are currently in place are already more than adequate in safeguarding the city’s banking sector from any risks in the property sector”.
The Jones Lang LaSalle report also urges the Government to rescind the Buyers Stamp Duty (“BSD”) for properties valued at over HKD20 million as the luxury housing sector should not be restricted in a free market.
Mr C K Lau, Head of the Valuation Advisory Services of Asia, Jones Lang LaSalle commented: “Whilst it is still too early to assess the longer-term impact of these restrictive measures on the investment market, a number of leading private sector interest groups have expressed concerns about the DSD on commercial property transactions, arguing that foreign firms are being unfairly targeted and citing higher operating costs under the new measures. We are concerned that the risk premium for investing in Hong Kong would be increased, and would therefore turn off potential investors. The higher stamp duty rates is also reducing market transparency, as investors seek to circumvent the higher charges by purchasing property through share transfers. If this continues, Hong Kong’s standing as an investment destination within the region would be affected over the longer term."
Mr. Tsang added, “The unintended consequences arising across the property sectors have rung the alarm bell over the measures in place. We believe that rescinding the DSD and replacing the SSD with a capital gains tax would have an immediate effect on secondary supply and would be a step in the right direction for a healthier property market.”