Hong Kong Property Cooling Measures, will it last?Near the end of October, the government, quite surprisingly, introduced new cooling measures designed to ensure the healthy and stable growth of the residential property sector and avoid a bubble. A bit of a spike in prices (including some record sales figures) and speculation prompted Chief Executive Leung Chun-ying’s administration to act, possibly as the first in many steps. The new regulations are indeed likely to have an immediate effect, but most real estate professionals — from the high-end international agencies to the local mass-market groups — don’t expect the slowdown to last.

Effective immediately, the newest cooling measures are a revised special stamp duty increase to 10 to 20 percent (from 5 to 15) and a buyer’s stamp duty, wherein corporate and non-local buyers will be hit with a 15 percent levy in addition to the existing stamp fees.

So what does it all mean? The special stamp duty was geared specifically to deter speculation: property resold within six months of purchase was subjected to a 15 percent tax, with decreasing rates the longer the property was held. The most significant difference now is that properties resold between two and three years of purchase are now slapped with a 10 percent duty where there was none before. Simon Lo, executive director of research & advisory, Asia for Colliers International, speculated in a special report that these demand-side measures were instituted so aggressively to stabilise a market that was becoming out of reach for first-time and sandwich class buyers. “But genuine end-users are now exposed to greater risks as the stamp duty will apply for three years instead of two. But as long as tight supply and the low interest rate environment persists, massive selling pressure will be limited.”

The buyer’s stamp duty is targeted at Mainland purchasers. As Lo sees it, “The new BSD may be targeted at Mainland China property speculators, but it is likely to derail the home buying plans of expatriates who have not yet become permanent residents. The retreat of overseas buyers is expected to provide a short pause in the residential price rally and developers’ sales momentum.” The one-two punch of the non-local/corporate levy and the SSD could also push investors out of the residential market and into the commercial sector, where supply is similarly tight and rental yields are potentially stronger. But as Lo explains, there’s a sinister underbelly to watch out for there too. “The SSD may curb speculative activities, but hindering the money that flows into Hong Kong’s residential market has triggered concerns of a breakout elsewhere. Investors may divert cash into commercial and industrial properties, thereby pushing prices upward and eventually putting pressure on the property market again,” he warns.

Since the measure were announced only a few weeks ago, more than one casual conversation has pivoted on one person’s regret at not getting their permanent residency soon enough (as Lo theorised) or having just purchased a flat in the nick of time. End-users are likely to play the waiting game and owners are likely to play right along, particularly in light of the continued low interest rate environment. Everyone hopes to “buy low,” and there may indeed be a few desperate sellers out there but chances of that are low. Opportunistic “buying low” also involves just the right flat at just the right time — and the supply crunch isn’t going to change quickly enough for those circumstances to come together. Colliers expects residential sales transactions to drop by upwards of 40 percent in the next three months.

“With the introduction of the new BSD and revisions to the SSD, short-term traders will be out of the market and the majority of non-local buyers are expected to stay on the sidelines” Lo sums up. “Genuine homebuyers would adopt a wait-and-see attitude although there are individual bargain hunters out there for bottom fishing. Overall prices might come back down by 10 to 15 percent while rents will fall 5 percent in the next 6 months … Similar to the first launch of SSD in November 2010, there was a significant shift of capital flow to the non-residential sectors (offices and shops). This time ’round, the same will happen again unless there are any similar restrictions to be implemented by the government.” If nothing, it’s a good time to renegotiate your rent.