Chief Executive Mr John Lee Ka-chiu has emphasized from the start that his approach to policy will be results-oriented. This is great. He also stressed the importance of key performance indicators in evaluating the work of the Special Administrative Region government. This implies that his administration will make policies based on evidence. But good intentions are not enough. Policies must be evaluated against the intended goals and other important criteria pertinent to the well-being of Hong Kong residents.
Since 2010, Hong Kong has followed Singapore’s lead in using the Special Stamp Duty (SSD) to discourage speculative activities. In Singapore, the tax is called the Seller’s Stamp Duty, which was introduced in February 2010. The Special Stamp Duty first took effect on Nov 20, 2010, in Hong Kong. At its height, the highest Seller’s Stamp Duty rate payable in Singapore was 16 percent, which was applicable for properties sold within one year of purchase, when the purchase took place between Jan 14, 2011, and Mar 10, 2017, inclusive. Hong Kong raised the SSD rates for properties bought on or after Oct 27, 2012, and extended the SSD payable years to three. The highest SSD rate applicable in Hong Kong stands at 20 percent, which is payable for homes sold within six months of purchase if the purchase took place on and after Oct 27, 2012. Since March 11, 2017, the maximum Singapore stamp duty has been cut to 12 percent. But the SSD rates in Hong Kong have never been cut. Whereas homes in Singapore sold after one year are subject to only an 8 percent stamp duty, and those sold after two years are subject to a 4 percent stamp duty, in Hong Kong, homes sold after one year and up to three years are still subject to a 10 percent SSD. Hong Kong’s special stamp duties are currently much tougher than those in Singapore. Recently, Financial Secretary Paul Chan Mo-po reiterated that he has no intention of lowering the SSD or alleviating the terms for SSD to be payable.
For the government to be so forthright on a policy that has been kept for well over a decade, one would expect that the policy must have achieved its goals well and that it has served Hong Kong well.
Strangely, however, there is virtually no evidence that the SSD has achieved its intended goals of making buying a home easier for Hong Kong residents. On the other hand, there is a lot of evidence to show that the unintended consequences of the tax run counter to the interests of Hong Kong residents at large.
The evidence shows that after the SSD took effect, starter-home prices began to skyrocket. This has never been seen before.
... There is virtually no evidence that the SSD has achieved its intended goals of making buying a home easier for Hong Kong residents. ... There is a lot of evidence to show that the unintended consequences of the tax run counter to the interests of Hong Kong residents at large
According to data from the Rating and Valuation Department, housing price indexes for the smallest flats (Class A) fell significantly behind bigger flats (Classes D and E) prior to 2010. The former had risen 52.5 percent by 2010 since 1999; the latter had risen by 93.8 percent. However, after the SSD took effect, Class A housing prices skyrocketed. By 2020, A-class home prices had risen 323.2 percent, and Class D and Class E home prices had risen 215.5 percent, both since 1999. With smaller flat prices soaring to record highs, developers flocked to build tiny flats. So there has been a proliferation of tiny “nano-flats” in recent years. Hong Kong people started to live in smaller and smaller homes on average, reversing the earlier years of steady improvement. These facts are well known and beg for an explanation. Economists have a ready answer to offer: supply and demand. But the HKSAR government, on introducing the SSD, touted it as necessary and an effective way to curb demand. Again, the evidence is clear: Indeed, speculative demand for homes has dwindled to a trickle. Since the prices of starter-class homes have shot up, the only explanation for why prices soared is that supply has shrunk by even more.
The supply of starter homes, economists have long learned, generally depends on a “filtering down” process, which is the sale from homeowners who want to trade up. Typically, developers would focus on the production of better homes, which are generally pricier, and are sought after by homeowners who want to improve their housing conditions. The introduction of the SSD changed all this. Homeowners, in the face of the SSD, generally prefer not to trade up because trading up would “lock them up”, holding the newly purchased home for three years. Since trading up is not really necessary, opting to “stay put” appears to be the rational thing to do. Again, the evidence is clear. After the SSD was introduced, a significant decline in housing market turnover was observed, signaling a decline in trading-up activities.
Since many economic activities, particularly services, are tied to turnover in the housing market, we do expect that with housing market turnover turning south, economic activities would weaken, and economic growth would slow down. It turns out that the average of growth rates from 2011 to 2018 was a mere 3.2 percent. This compares with the average growth rate from 2000 to 2020 at 4.45 percent, and that from 1989 to 1999 at 3.51 percent. In general, when turnover in the housing market is high, not only do real estate brokers do well, but also banks and lawyers, renovation workers, and retail sales, transportation workers and interior designers.
As to the Buyer’s Stamp Duty, I had earlier advised that those who come to Hong Kong to live here and work here should be exempt from it. This is the least we can do to tell them that they are welcome here.
The author is director of Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.
The views do not necessarily reflect those of China Daily.
