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Thursday, 24 April 2014

Stamp of disapproval

Asia's property taxes are covert capital controls

Asia’s city-states are experimenting with a new form of capital controls: property taxes. In its latest effort to cool the market, Hong Kong has hiked stamp duty for real-estate transactions, apart from those that involve local first-time buyers. Discriminating against foreign speculators may distort the market and have limited success in constraining prices. Yet its popular appeal is clear.

Property markets in Hong Kong and Singapore are showing distinctly bubble-like characteristics. Despite repeated attempts by the authorities to reign in speculation, prices just keep rising. Residential real estate in Hong Kong has more than doubled in value since 1999: commercial property is up 250 percent. Buyers are now rushing to snap up hotel rooms – which may be exempt from residential taxes – and even parking spaces.

Yet the risks to the financial system appear to be contained. Monetary authorities in both city-states have intervened to prevent excessive borrowing: the average new Hong Kong mortgage accounts for less than 55 per cent of the value of the property. And banks must now assume that mortgage rates will rise by a full 3 percentage points when assessing borrowers’ ability to service their debt.

The problem is that Hong Kong and Singapore are seen as safe havens for foreign investors desperate for secure assets. And rising real estate costs cause social tension. Expensive property is one of the main reasons for popular discontent in both city-states.

That’s why both have decided to discriminate against foreign real-estate buyers. In December 2011, Singapore introduced an additional 10 percent levy for purchases by non-residents that it hiked to 15 percent in January this year. Hong Kong adopted its own 15 percent tax last autumn. Add in the latest measures, and the extra tax is significant: a Hong Kong resident who doesn’t already own property will pay 3 percent of the purchase price when buying a HK$5m ($645,000) apartment. A non-resident buying the same apartment will have to hand over 21 percent.

So far, the measures have only succeeded in slowing, rather than reversing, the rise in property prices. Yet as long as investors are desperately looking for somewhere to park their cash, the pressure for further controls will only increase.

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Context News

Hong Kong on Feb. 22 raised stamp duties for real estate purchases in an attempt to cool overheating in the real estate sector.

Financial Secretary John Tsang said “exuberance has regained momentum” in Hong Kong’s property market. He said the measures were needed to keep the potential economic risk from spreading in the financial hub.

“The risk of an asset bubble is increasing. If we allow the bubble to grow, in the end it will affect the macroeconomy and also the stability of the financial system. It will be very damaging to society,” Tsang told reporters.

For flats costing less than HK$2 million (about $258,000), the stamp duty was increased from HK$100 to 1.5 percent of the transaction price. The stamp duty for other properties was doubled to as much as 8.5 percent of the transaction price.

However, the increased stamp duties will not apply to Hong Kong residents who do not already own property in the city.

The government also said it would standardise the stamp duty regime for non-residential properties such as shops, factory space, office space and even car parking spaces to avoid speculative hot money flowing into these other categories.

Separately, the Hong Kong Monetary Authority said banks would be required to assume a 300 basis point increase in mortgage rates when testing borrowers’ ability to repay loans. It also said banks would have to apply minimum risk-weights of 15 percent to mortgage loans when calculating how much capital to set aside.

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