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News Release

Hong Kong

Jones Lang LaSalle: Higher stamp duty not the answer for climbing residential prices, but more land sales is the right direction to go

The new measures to lift the stamp duty from 3.75% to 4.25% for residential properties above HK$20 million as proposed by the Financial Secretary in his Budget Speech today, will do little to stabilise residential prices in Hong Kong. The underlying problem behind the fast-climbing residential prices is a persisting supply-demand imbalance across the entire residential market and the solution lies in a stable supply of lands in the long run; fortunately this is also addressed in today’s Budget Speech, according to Jones Lang LaSalle.
A higher stamp duty for luxury properties is a questionable solution to cool speculative activities, alleviate public concerns about an overheating market, and help end-users buy more affordable homes.
Firstly, properties with a price tag of HK$20 million or above represent only a niche segment. In 2009, only 2%, or about 2,300 units, of all residential transactions involved properties of HK$20 million and above. Raising the stamp duty on this small handful would hardly help to stabilise capital values in the overall residential market.
Secondly, such a move may set up barriers for end-users seeking to upgrade their living environment, with ramifications for the mass and medium market.
“In a market short of new units, with low interest rates and high money liquidity, a heavier stamp duty is hardly the best answer to climbing prices. The proposed measure would have very limited impact on the overall market,” said Marcos Chan, Head of Research, Greater Pearl River Delta, Jones Lang LaSalle.
“On the contrary, it could restrict a certain group of aspiring end-user buyers. A significant portion of transactions in the above HK$20 million price category in 2009 were generated from end-users upgrading from HK$15-20 million units. A higher stamp duty would make it more difficult for such owners to upgrade to a better living environment. This reduced market liquidity could further filter down to the mass and medium market ultimately through a domino effect, leading to higher prices in the mass and medium market as tradable stock availability is reduced.”
In fact for all residential transactions above HK$20m in the past 5 years, consistently about 60% involved properties in the range of HK$20-30 million, we believe the majority of which were purchases by end-users upgrading from $15-20m properties.
Moreover, cooling speculative activity is not an urgent priority for the market. Sub-sales (a proxy for speculative activity) only accounts for a small percentage of all residential transactions. In 2009, sub-sales only accounted for less than 2% of all residential transactions and even lower at around 1.6% for properties over HK$20 million, indicating a relatively low level of speculative activity.
The note on the possibility of extending these measures to transactions below HK$20 million, should there are signs of excessive speculations, is also laying a certain level of uncertainties to the overall residential market.
The move will likely bring about a relative slowdown, though temporary, in market activity in the luxury residential market by triggering a drop in upgrading end-user demand as well as investment demand.
“Understanding what caused the recent round of run-up in luxury property prices can provide a better indicator of what action would truly address the problem. An ultra low interest rate environment, an influx of money liquidity, and a gradual change in buyers’ profile all compounded to drive up property prices in the past year.  These drivers are essentially exogenous and mostly outside the government’s control. But perhaps one of the most critical drivers, and one which is within the government’s ability to influence, is the extremely tight level of future supply,” said Marcos Chan.
In addressing this growing need for residential plots as one of the possible strategies to help better balance the demand and supply situation in the residential market, the Financial Secretary also proposed measures to refine the current land sale system. While the Application List system will remain in place, depending on market conditions, the government will now arrange for additional land auctions to facilitate bidding without going through the application process.
“We welcome this good and sensible move as there has been a clear shortage in new residential supply in recent years which led to not only a widened price gap between primary and secondary residential properties, but also a surge in general residential price levels. The availability of more residential sites for sale will help alleviate supply pressure and result in a more sustainable market development platform. Although details about the government initiated land auctions were not given in today’s Budget Speech, we anticipate to see the availability of smaller urban plots in these events while possibly leaving the larger pieces for developers’ trigger from the Application List. We trust the smaller plots will stir the interests of small to medium sized developers, fuelling the market with more new supply down the road,” remarks Marcos Chan.
We are, however, concerned about the government proposal to impose minimum number of units on the tender site near the West Rail Long Ping Station which will effectively restrict the size of units to be built. Although we are yet to see the details about the implied average unit sizes, we noticed the growing upgrading demand for new and bigger units. By imposing such requirements, developers’ commercial judgement would be restricted and this is not the most efficient way of using our valuable land resources in Hong Kong. 
“In spite of the various policy measures in today’s Budget Speech, the short-term outlook of the residential market will remain upbeat until various favourable market conditions of low interest rates, ample money liquidity and tight immediate supply of new units disappear . The luxury segment may see a temporary slowdown as a result of the stamp duty hike and immediate stamp duty payment requirement but tight supply on the back of a strong aspiration for upgrading properties and a growing pool of affluent Mainland Chinese buyers will see demand rising again sooner or later. We do not see a great chance of residential capital values reversing their growth trend in the short term future.”