Tough measures, more housing supply are both needed

As the saying goes, desperate times call for desperate measures. With the third round of quantitative easing (QE3) kicking in, bringing an overflow of hot money into Hong Kong's property market, our financial chief John Tsang pulled no punches in nipping a property bubble in the bud.

Indeed, the punches he threw last week were fast and hard enough to cool the roaring property market. The heavy doses that take immediate effect include a new punitive 15 percent stamp duty on home purchases by companies and non-local buyers, as well as a 5-percent rise in the punitive stamp duties - ranging from 10 to 20 percent, on properties that change hands within three years of purchase, extending the penalty period by a full year.

The government's intentions are obvious. These punitive measures are aimed at curbing the flames of property speculation from spreading, by shutting mainlanders out of the local market. The government expects to deter speculators and so bring down prices that it hopes will make the property market more affordable for locals. In other words, these special stamp duties send out an important message to home buyers and speculators - from now on the city's housing policies will be geared towards a user-oriented approach to serve the housing needs of locals only.

With the increasing flood of hot money into the city caused by QE3, there is indeed little choice for the government, but to act immediately to stem the flow into the property market and curb the bubble. We have to face the reality that an increasing influx of mainland home buyers snapping up the city's flats has jacked up prices and rents to an unbearable level. Buyers who were not permanent residents accounted for 19.5 percent of new-home purchases last year, drastically up from 5.7 percent in 2008.

In fact, the impact was felt immediately after the announcement. Initial reports showed transactions in new flats dropped to almost zero over the last weekend, and the secondary market was also hard hit. Home hunters seemed to shun flat purchases, but it remains to be seen how effective these measures will prove in the long run. However, I would say that only a heavy dose can dampen the flames of anger fanned among aspiring local home buyers against mainlanders as well as the government.

Compared with the 10 percent levy on foreigners and non-individual buyers by its counterpart Singapore, the 15 percent tax imposed on non-local buyers and companies by the SAR government will no doubt be seen as too harsh and draconian. This raises concerns from the business sector that the crackdown on the residential property market will cause speculation to spill over to commercial premises, including shops and industrial buildings. Inevitably, small and medium-sized enterprises may be driven out of business. Some even are calling for an exemption for firms registered in Hong Kong, whose shareholders and directors are all Hong Kong permanent residents.

This is indeed a grave problem worthy of concern as there have been mounting grievances from small and even big businesses about their operations being crippled and stifled by sky-rocketing rents. However, the government is quick to reject such calls, saying any exemptions would only create a loophole for non-locals to speculate on property through local companies operated by locals.

I am doubtful as to whether the loophole is so big that its side effects would outweigh the advantages brought by the exemption. But the government cannot disregard the possible spill-over effect on the commercial property market. If speculators turn their attention to commercial property to feed their appetite, the government should consider introducing a capital gains tax to further cool the red-hot market.

Another question is whether all this ammunition can really put the sizzling property market back onto the right track. If all these punitive measures are aimed at helping aspiring local home buyers to get on the property ladder, there is a need to review the 30 percent down payment required for first-time home buyers to obtain a mortgage. For a modest flat valued at HK$3 million, one needs to dish out about HK$1 million for the down payment, an unaffordable price for many home buyers.

For the government, the most important thing is to make housing affordable to meet the demand of aspiring local home buyers. From the case of Singapore, transaction volumes fell initially after the introduction of the levy last December. Later volume rebounded and prices have continued to rise. The government should know that only a stable supply of land together with the punitive tax measures can tackle the housing problem in the long run. But some tough measures acting as deterrents against property speculation are necessary to prevent the market from overheating.

The author is a current affairs commentator.