TAX NEWS - June 2010

Hong Kong Tax: Hong Kong Raises Tax on Luxury Homes to Cool Market

Hong Kong raised the transaction tax on luxury homes and said it would boost the supply of residential apartments in an attempt to cool the property market as the economy expanded faster than economists estimated.

Stamp duty on homes selling for more than HK$20 million ($2.6 million) will rise to 4.25 percent from 3.75 percent, Financial Secretary John Tsang said today in his budget speech for the year beginning April 1. The government will also put more residential sites up for auction, depending on market conditions, he said.

Low mortgage rates drove a 29 percent gain in home prices last year. Buyers of luxury properties were undeterred by an October increase in down-payment requirements from 30 percent to 40 percent. Tsang said inflows of capital raise the risks of asset bubbles in Hong Kong.

"The inflow of funds has fuelled an increase in the prices of luxury flats, which to some extent has affected the prices of small and medium-sized flats," Tsang said. "This, together with a relatively low supply of flats in the past two years, has led some people to worry that their plans to buy a home may be frustrated."

Luxury property prices, for which there is no official index, may have risen as much as 40 percent, according to Nicole Wong, a Hong Kong-based real estate analyst at CLSA Asia-Pacific Markets, the regional brokerage unit of Credit Agricole SA.


Prices Jump

Sun Hung Kai Properties Ltd., the world's biggest developer by market value, reported selling 900 homes in the suburban Yuen Long area for HK$4.2 billion on Feb. 20 and 21, or an average of HK$5,400 per square foot. That compared with HK$3,000 in the same area a year ago, Centaline Property Agency Ltd. said.

A stimulus-driven rebound in mainland China, the fastest- growing major economy, is aiding Hong Kong via demand for exports and financial services and 18 million tourist arrivals in 2009. Tsang forecast an expansion of between 4 percent and 5 percent this year.

Fiscal stimulus measures by governments around the world have created a spike in liquidity, much of which has found its way to Asia, driving up asset prices, Tsang said.

Hong Kong isn't alone in worrying about asset bubbles. The Chinese government has raised the amount of money banks are required to keep as reserves twice this year and raised taxes on homes sold within five years of their purchase. Property prices across 70 cities in the country increased 9.5% in January from a year earlier.


Supply Side

In Hong Kong, the primary source of land available to property developers is through government auctions. The operator of the city's Mass Transit Railway, the MTR Corp., and the Urban Renewal Authority also put land up for tender. A number of developers also own farmland on which they must pay a land premium to the government before building on it.

The Hong Kong government will change the way it puts sites up for auction, Tsang said. Under the current system, developers must indicate interest in a site on a government list. Once a "trigger price" has been met, the site is auctioned. Tsang said the government would consider putting sites up for sale even if they haven't been triggered.

"Overall the government wants to increase the land supply," said Buggle Lau, chief property analyst at Midland Holdings Ltd., who noted there were only two land auctions last year. "In the past the land bank replenishment pace has not been very fast."

The government is also pushing the MTR and URA to sell more sites, Tsang said.