Hong Kong Property Curbs Have Some 'Unintended' Victims
Hong Kong residents Chris Lane and his wife, Karen are planning to have a second child – but find themselves hampered by the city's housing policy.
In October last year, the government slapped a 15 percent sales tax on property purchases by people who aren't permanent residents in the city. Lane, a Californian, and Karen, with roots in both Hong Kong and Singapore, spent the last few years in Japan, selling real estate there before returning to Hong Kong, where it requires seven consecutive years of residency to qualify as a permanent rather than temporary resident.
So they found themselves out of luck. The couple owns a 1,100 square foot apartment in Quarry Bay, a middle-class neighborhood on the east side of Hong Kong island, but the new tax makes it practically impossible for them to upgrade.
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Hong Kong has also brought in a series of restrictions on mortgages, most recently toughened in September 2011, which require all buyers, whether foreign or local, to put down at least 50 percent of the purchase price as a down payment on homes worth HK$10 million ($1.3 million) or more. Last October, the government also increased and extended a tax on quick re-sales to as much as 20 percent of a property's sale price, if it was sold within six months.
The Lanes find the sales tax particularly punitive. "It has basically kicked us off the property ladder," Chris Lane said. "They are discriminating against all the people who live and work here, and want to buy their own home and don't want to rent."
Hong Kong's new rules have had the effect of freezing the market – transactions fell 29 percent last year compared with 2010, when the government began its curbs, according to government data. Though the restrictions are widely viewed as being directed at mainland Chinese purchasers, other expatriates and upgraders alike are finding it hard to move up the property ladder.
Hong Kong's chief executive, C.Y. Leung, said that tackling Hong Kong's housing problem is the "top priority" of his government, in his inaugural policy address on January 16. Though he did not introduce additional curbs, he is focusing on ramping up the supply of new and repurposed sites for residential development.
Such measures will take four or more years to work their way into the market, property analysts said. Meantime, property agents said the measures already in place have had unintended consequences, targeting non-locals in a way that some see as unfair.
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"The only people I'm really seeing in the market at the moment are permanent residents looking for self-use," Victoria Allan, the founder of property agency Habitat Property, said. "I've just told my clients who don't have their permanent residency 'Bad luck.'"
Professional investors are also affected by Hong Kong's new rules, since any corporate buyer also has to pay the 15 percent tax. Between October and November last year, residential purchases plunged 19 percent, putting a lot of pressure on real-estate agents as non-Hong Kongers exited the market. Some see the new rules as going against Hong Kong's tradition of being a free market.
"It's not a good situation to be in if you're a foreigner," Danny Lim, an Indonesian-born, Australian-raised investor who runs property funds via his company The Creations Group, said. "They should repeal that [15 percent tax] or make it across the board. It doesn't seem fair. It's going to have unintended effects."
Priced Out
Hong Kong is unlikely to see strong economic growth this year, according to economists. The consensus forecast is for a 1.4 percent increase in gross domestic product, the second-worst rate in Asia ahead of only Taiwan's 1.1 percent growth. But housing-price and rental increases are likely to run ahead of that rate, analysts said, stretching affordability.
One Australian pilot for Cathay Pacific, Hong Kong's flagship airline, says he, his wife and his three children are all moving back to the Gold Coast as a result of the new curbs on property purchases. They owned a two-bedroom property on Lantau Island, near the airport, but after selling that find they're not able to purchase a sufficiently big place for a family of five as an upgrade, thanks to the tax.
"It has negated all the advantage of coming to Hong Kong," the pilot, who did not want to be identified because he is not authorized to speak to the media, said. "It has made me a little bit angry."
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According to Paul Louie, Nomura's property analyst for Hong Kong, "Home prices are now at 13 times the level of income. Prices have run well ahead of wages – a year ago, income was growing at 15 percent, but now it's only growing at 2 percent. People are willing to overspend in a market that's moving up but there is a point where you're not able to overspend."
Alfred Lau, Hong Kong property analyst at BOCOM International, anticipates a 5 percent increase in home prices in 2013, thanks to the U.S. Federal Reserve's pledge to keep interest rates at very low rates until at least the middle of 2015. According to the property brokerage Knight Frank, mass market property prices rose a rapid 23 percent last year.
Real estate consultants Savills anticipate a price increase of 5 to 10 percent for both luxury apartments and townhouses in 2013, with rental increases at the bottom end of the same spread.
Chinese Demand Robust
While most foreigners seem to be getting priced out of the Hong Kong market, buyers from the mainland are less likely to be affected, said analysts because they are often cash buyers who don't require mortgages. China's wealthy continue to consider Hong Kong a prestigious safe haven to place their money.
Still, Hong Kong's 15 percent tax may push them to consider property in other Asian cities or the newly recovering home market in the United States. Singapore has put in place similar restrictions, meaning it has lost any advantage it might have had over Hong Kong for Chinese investment.
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With few investment options at home, though, and even tougher home-purchase restrictions on the mainland that bar second-home purchases, Hong Kong is likely to continue to draw mainland cash, said experts.
According to figures from property agency Centaline, mainland Chinese buyers accounted for 31 percent of new homes, in value terms, sold in Hong Kong in the third quarter of last year – but that was before the fresh curbs went into effect the next month.
They have shown a marked preference for new apartments and together with the secondary market, they made up 16 percent of the value of sales in the third quarter of last year, according to Centaline's figures, the most recent available. For new luxury homes, they still made up an eye-popping 51 percent of the value of sales.
Hong Kong "is slowly becoming a mainland Chinese city," the pilot added. "Expats are going to become a minority in terms of attention."
