Hong Kong plugs property tax loophole amid home-buying spree

Hong Kong's Chief Executive Leung Chun-ying announced late on April 11 that  first-time home buyers acquiring more than one property in a single contract will be charged the same 15 per cent stamp duty that applies to purchases of a second property,
Hong Kong's Chief Executive Leung Chun-ying announced late on April 11 that first-time home buyers acquiring more than one property in a single contract will be charged the same 15 per cent stamp duty that applies to purchases of a second property, rather than the 4.25 per cent duty for first-time buyers.PHOTO: BLOOMBERG

HONG KONG (BLOOMBERG) - Hong Kong's government tightened property rules for the second time since November to shut a loophole that allowed investors to snap up multiple units in one shot to qualify for lower tax rates.

Under the new rules, first-time home buyers acquiring more than one property in a single contract will be charged the same 15 per cent stamp duty that applies to purchases of a second property, rather than the 4.25 per cent duty for first-time buyers. The change, announced late on Tuesday (April 11) by Hong Kong's Chief Executive Leung Chun-ying, took effect at midnight.

"Though buying multiple flats in one contract accounts for a small proportion of residential apartment transactions, there's a noticeable increasing trend," Leung said at a briefing on Tuesday. "This doesn't only go against the government's goal to clamp down investor demand through the new stamp duty, it also fuels the property market sentiment."

Hong Kong's leaders in November imposed higher stamp duties targeted at all but first-time local buyers. The curbs have done little to cool demand, with developers offering discounts and tax rebates. People have also been able to find legal ways around the restrictions, with some purchasing several units at the same time so they could still qualify for lower tax rates.

The latest move will do little to cool prices in the world's least affordable housing market, analysts said.

"The measure's real impact on the housing market will likely be mild, if not negligible," Alan Jin, Asia ex-Japan property analyst at Mizuho Securities Asia in Hong Kong wrote in a note. While the practice of buying multiple homes on one contract accounted for about 25 per cent of sales in mid-March, the drop in demand from investors "can be easily made up for by real buyers," he said.

The move should help owner-occupiers, Raymond Cheng, property analyst at CIMB Securities in Hong Kong, wrote in a note. "Many end-users complained that they didn't have a chance to buy as developers gave priority for multi-unit buyers."

CIMB forecasts primary market transaction volume will remain strong at 10 per cent to 15 per cent growth this year, while house prices will rise as much as 5 per cent.

Existing home prices have climbed to fresh records, according to the Centaline Property Centa-City Leading Index. Even after the Federal Reserve raised interest rates, a move that presages higher mortgage rates, developers have seen brisk sales.

Cheung Kong Property Holdings last week offered 40-square-metre flats in east Hong Kong island for at least HK$10.3 million (S$1.84 million), Apple Daily reported. The amount could buy a two-bedroom, inner-city Sydney apartment with a car park, according to real estate website Domain.com.

Hong Kong's de-facto central bank on Monday expressed concern about the riskiness of mortgages issued by developers with high loan-to-valuation ratios. The accumulation of these mortgages may change the risk-profile of developers to which banks may have exposure, said Raymond Chan, executive director for banking supervision at the HKMA.

The HKMA may ask banks to take additional steps to manage their exposure to the sector, Chan said.

Housing prices in Hong Kong are close to their peak and economically "unsustainable," according to Cusson Leung, managing director at JPMorgan Chase & Co's Asia Pacific equity research unit.

Price increases in the city have outpaced economic growth "significantly" since 2009 and any external shocks could trigger tighter liquidity in the banking system, he said.