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Why Hong Kong’s Property Crackdown Won’t Dent Home Prices

Monday, 29 Oct 2012 | 3:27 AM ET

Hong Kong's latest round of property measures to curb speculation by foreign buyers is likely to have a minimal impact on cooling sky-high prices in the island-state, say experts, with tight supply conditions and demand from local homebuyers preventing any large declines in home values.

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The government announced its third set of measures in two months late on Friday. They included a 15 percent tax for overseas buyers and non-local companies and a 5 percent rise in stamp duty on property transactions with the period for which the tax is applicable extended from two to three years.

While the new measures are expected to lead to a plunge in transaction volumes, as buyers from mainland China – which account for 20 percent of total market transactions – hold off their purchases, declines in home prices will be limited, say analysts.

Residential property prices, up 15 percent so far this year, are likely to correct by just 5 percent in the coming months, according to Deutsche Bank.

"The measures kick out 20 percent of the buyers for luxury properties in the primary market. (But) the physical market remains very tight – new construction has been very low for the last few years – so it's hard to get too bearish about property prices," Michael Spencer, chief economist, Asia Pacific and co-head, global economics Deutsche Bank, told CNBC.

After Hong Kong introduced its special stamp duty in November 2010 for properties bought and sold within 24 months or less, to curb speculation in residential properties, transaction volumes fell 30 percent within three months, but prices were stable, he noted.

Barclays property analyst Andrew Lawrence agrees the new measures will have limited impact on prices.

"The biggest impact of these measures will likely be seen in declining sales volumes rather than in any significant price correction," he wrote in a note.

In addition to limited supply, Hong Kong's record low mortgage rates remain a key support for property prices, say analysts. The Hong Kong Monetary Authority, its defacto central bank, keeps the city's lending rate tied to the U.S. Federal Reserve's to maintain the currency's peg to the U.S. dollar and so an outlook for low interest rates in the U.S. tends to mean the same in Hong Kong.

In order for the government to make property prices more affordable, increasing land supply is the key, Spencer said. However, he added that the government is unlikely to encourage a significant fall in prices, as it would trigger a negative wealth effect.

"I'm not sure they want prices to fall too much – half of the people (in Hong Kong) own property. Prices have been up around 15 percent year-to-date, they will be happy if we unwound all of that, but I'm not sure if we'll get prices down that much," he said.

Dump Developers?

The shares of real estate developers tumbled on Monday in response to the property measures, with shares of Sun Hung Kai Properties and Swire Properties down 5.7 and 2.5 percent, respectively.

According to Barclays, the developers most likely to be impacted are those with a focus on luxury residential developments as mainland buyers make up almost 30 percent of transactions in the high-end market.

The bank said Sino Land and Sun Hung Kai Properties could be the most vulnerable, with Swire, Hang Lung Properties and Kerry Properties also exposed to the luxury segment.

"Swire with its luxury-end residential development strategy, Hang Lung Properties and its West Kowloon Harbour Side inventory, a location of strong mainland demand, and Kerry Properties with its luxury residential investment portfolio, will be negatively impacted," said Lawrence at Barclays.

(Read More: End of 'Obscene' Profits for Hong Kong Property Firms)

Because property stocks account for around 30 percent of MSCI Hong Kong's otal market cap, the index may also fall under pressure, Deutsche 's Spencer added.

Commercial Property to Benefit

One beneficiary form the decline in foreign interest in residential property could be the commercial real estate sector, said Nicole Wong, head of regional property research at CLSA.

"Commercial property, industrial building asking prices are already going up over the weekend," Wong said.

As a result, Wong said she is bullish on landlords that have extensive commercial property holdings including Hong Kong Land nd Wharf Holdings.

"In 2010, after the Special Stamp Duty, landlords outperformed the developers by 12 percentage points within three months. History will repeat itself," she added.