Does the Government Have More Tricks Up Their Sleeve

Strong earthquakes often trigger massive landslides. Giant rocks along with soil roll down the mountains and form a debris dam that blocks the river. Water is trapped in this barrier lake and keeps accumulating. With time, increasing water pressure reaches the threshold and breaches the dam, leading to catastrophic downstream flooding—an extremely dangerous geologic hazard. 

In the past, I have likened the government’s control measures to rein in housing prices and the subsequent accumulated purchasing power to the barrier lake and the resultant flood. Back in 2008, such “spicy” regulations were taken to prevent too much “hot money” from flowing into the Hong Kong property market. By raising the stamp duty, it forces buyers to take a second thought before making aggressive purchases, thus can theoretically arrest the price hike. In addition, stress test raises the bar for mortgage and the difficulty of property-buying, hence can cool the market and suppress prices. However, in reality, as long as investors think the potential profit is greater than the additional stamp duty, they would still find ways to make more purchases. 

In recent years, whenever there is an explosion of purchasing power that makes the government feel the need to address, they immediately go to implementing additional “spicy” measures, which suppress justified purchasing power and shut down market transactions. It is a method that only treats the symptoms. Naturally, as the government never manages to convince the public that there will be enough land supply being added to the market, upon the realization that housing prices are actually slowly climbing instead of going down, people start to seek buying opportunities again, fearing that inaction would cause them to be left behind.

At the end of last year, noticing that the property market is becoming active again, the government rushed to increase the stamp duty to 15% as an attempt to curb the price hike. However, experienced investors saw that the Hong Kong real estate market was still more profitable compared to other regions, and found a way to evade the heavy taxation. Some of them managed to enter the market as first-time buyers and avoided the 15% levy. The indirect result was that the secondary market kept breaking high price records, which in turn caused the primary market to be in high demand. Developers thus raised home prices.

The Hong Kong housing prices are currently soaring like the overflowing water inside a barrier lake, while the control measures are a dam on the verge of breakdown. So let’s keep our eyes open and see how the administration reacts to the situation.   

>> Issue 267: Excessive land supply leads to housing price dip?