The one thing the HK government can do to soothe the battered residential market

The government holds the key to re-igniting Hong Kong’s residential property market. Lift the SSD.

In November 2010, Hong Kong implemented new stamp duties as “cooling measures” to slow the drastic rise in home prices, which many blamed on the demand from non-residents and property investors. Hong Kong permanent residents who are first-time homebuyers are exempt from most stamp duties.

The government imposed the first phase of a special stamp duty (SSD) on individuals and companies that acquire residential property and re-sell it within 24 months. If the sale was within six months of the purchase date, the SSD would be 15% of the transaction price. The SSD dropped to 10% if the sale was within 12 months and 5% if the sale was within two years. 

Initial range of SSD

After almost two years, the government spiced up the SSD, asking sellers to pay 20% of the transaction price if they re-sell their home within six months of purchase. The other penalties were adjusted accordingly, and the time frame was extended to 36 months.

First SSD increase

On 28 July 2003, the Individual Visit Scheme (IVS) was implemented for visitors from China Mainland. It brought substantial economic benefits; the number of tourists visiting Hong Kong from Mainland China increased significantly from 6.38 million in 2002 to 40.75 million in 2013, accounting for 41.2% of the total number of tourists visiting Hong Kong every year. The increase directly benefitted Hong Kong's economy by creating employment and business opportunities. It also attracted more PRC property buyers who wanted to live in Hong Kong and increased the demand for homes.

According to the Rating and Valuation Department, from 2009 to 2012, overall residential price indices dropped 21% to 11% in 2011 but increased more than 20% by October 2012.

Buyer’s Stamp Duty

Overall private residential transactions 2009 to 2022 (till 19 May)

Source: Midland Research

So, what was the reasoning behind the government’s SSD in 2012?. Before 2009, buyers in Hong Kong could easily “摸貨” – or enter “confirmor” sales – by signing a Formal Sale and Agreement (S&P) with the seller and then re-selling to another buyer at a higher price even before the formal S&P date, allowing them to earn money in the deals.

According to the Inland Revenue Department, buyers had to pay stamp duty when they signed the formal S&P. Let me use City One Shatin as an example to see why it was so easy to re-sell before the SSD was launched.

I worked out the average sales price on a home with an average saleable area of 285 sq. ft. The average price in this development was HKD1.5 million in 2009, but by 2010, the price had jumped to HKD2 million. At the time, with confirmor sales, it was easy for investors to earn a profit of around HKD500,000, and the new buyer only paid HKD100 stamp duty to acquire the flat.

After the first SSD came out in October 2010, prices in City One Shatin climbed to HKD2,450,000. If the original buyers planned to re-sell their flats after six months and before 12 months, they needed to pay HKD36,000 (SD) plus HKD245,000 (SSD) for a total of HKD281,000 to complete the transaction. The seller would only make HKD169,000 profit, which wasn’t too bad.

The continued re-selling made the government revise the SSD on 27 October 2012. At this point, the SSD was too high for investors. It became too risky because it was too difficult to re-sell and earn money once they signed the formal S&P. But, the revised SSD also slowed market liquidity, and the number of transactions shrank from 2,138 in 2010 to 879 in 2012.

Transactions in City One Shatin before and after the SSD came into effect

Source: Memfus Wong

When I checked the same flat size in City One Shatin over the past three years, the number of transactions was still down. The primary buyers still found it too risky. If they couldn’t find a buyer, they would be looking for a mortgage and might not get one. Furthermore, if buyers who had owned their properties for less than three years wanted to buy a bigger flat, they would have also been dissuaded by the high SSD.

Transactions in City One Sha Tin before and after second SSD increase

Source: Memfus Wong

There is concern that relaxing the SSD would trigger a new wave of price increases and worsen the current affordability problem. However, in February 2022, the Hong Kong Monetary Authority adjusted the mortgage rules in February 2022, allowing mortgages of up to 90 per cent of the cost of a home for first-time homebuyers purchasing completed homes valued at up to HK$10 million. The increase makes the SSD counterproductive, as it limits market supply.

Even with the aid of the mortgage insurance programme, new prospective first-time homebuyers previously would have needed a down-payment of HK$1 million to purchase an affordable home valued at HK$5 million. They need to pay only HK$500,000 under the current mortgage rules, provided that they pass the stress test, which doesn’t follow the basic economic principle of supply and demand when the market is facing a supply shortage.

Lifting the SSD would increase market supply and drive the market price back to equilibrium. In addition, any derived speculative demand could be limited by the SSD returning.

Residential prices were up by 26.1 per cent and 23.7 per cent in the two years before the SSD was introduced, following the market recovery from the global financial crisis. Prices rose a meagre 1.9 per cent in 2018 and 5.5 per cent in 2019.

However, Hong Kong should consider optimising the SSD mechanism by revisiting the prevailing rates and referring to recent price movements. Home prices marched into negative territory in Q1 2022. The current SSD restrictions do not make sense under the prevailing market.

Price Indices from 2009 - March 2022

Source: RVD

The government forecast that some 95,000 residential units would be available in the next three to four years, but we expect only 85,000 units by 2024. One solution would be to drastically shorten the 36-month restriction to immediately boost market supply and facilitate transactions, especially for starter homes.

Relaxing or eliminating the SSD would temporarily alleviate the housing shortage problem until a sustainable housing solution can be found.

Thank you