Hong Kong Doubles Taxes To Limit Property Price Inflation
On February 22, Hong Kong’s Financial Secretary, John C Tsang, announced that the Government has decided to launch a new round of increases to stamp duty rates for both residential and non-residential properties, together with prudential supervisory measures for mortgage lending and insurance being undertaken by the Hong Kong Monetary Authority (HKMA).
In a statement, Tsang said that: “In an environment of persistent, ultra-low interest rates and abundant liquidity, the local private property market continues to be exuberant. It has been dominated by a firm expectation that property prices will continue to increase. The risk of an asset bubble is increasing.”
“The property price increased by 2% in January, and the momentum is continuing this month. In fact, prices have increased by 120% compared to the recent trough in 2008,” he added. In addition, “the price of non-residential property has also soared. In 2012, the price of retail space surged by 39%, office space by 23% and factory space by 44%. The number of transactions has also increased.”
The two measures introduced by the Government on October 27 last year, when the Special Stamp Duty (SSD) rate was increased and its restriction period was extended to three years, and the 15% Buyer's Stamp Duty (BSD) was introduced on resident properties purchased by those who are not Hong Kong permanent residents (HKPRs), did help to cool down the residential property market towards the end of 2012.
Transactions in November and December 2012 were seen to reduce sharply as speculative activities and non-Hong Kong permanent residents' (HKPR) demand subsided. However, Tsang concluded that the continued price inflation early this year “suggest to me that we need to introduce a new round of measures to further cool down the property market.”
With effect from February 23, 2013, the Government has, therefore, increased the cost of property transactions generally by doubling across the board the rates of existing ad valorem stamp duty applicable to both residential and non-residential properties. For transactions valued HKD2m (USD258,000) or below, the stamp duty will increase from HKD100 to 1.5% per cent of the consideration of the transaction.
Exemptions have been granted similar to those available in the existing SSD and BSD regimes. The new stamp duty rates will not apply to HKPR buyers who are not beneficial owners of any other residential property in Hong Kong at the time of acquisition of a residential property.
Secondly, while stamp duty is presently charged when a conveyance on sale of non-residential property is executed, the arrangement has been amended so that stamp duty is charged on an agreement for sale and purchase of a non-residential property. This amendment will standardize the stamp duty regime for both residential and non-residential property transactions.
Tsang believed that “the two new measures, together with the enhanced supply of flats, will help cool down the overheated property market,” both residential and non-residential. However, Hong Kong’s Chief Executive, C Y Leung, emphasized that “the Government will continue to monitor the property market. If the market continues to get overheated, we will introduce further demand-side management measures in a timely manner.”
The stamp duty changes have been taken simultaneously with housing finance measures announced by the HKMA, which has issued tougher guidelines to banks in a new round of prudential supervisory measures on their property mortgage business.
In stress-testing mortgage applicants’ repayment ability, banks are now required to assume a mortgage rate increase of 3%, instead of the previous 2%, applying to all mortgage loans for residential, commercial and industrial properties; the maximum loan-to-value (LTV) ratios of mortgage loans for all commercial and industrial properties is lowered by 10%; and the maximum LTV ratio of mortgage loans for standalone car park spaces is set at 40% and the maximum loan tenor at 15 years.
In addition, the Hong Kong Mortgage Corporation Limited has revised the eligibility criteria for the Mortgage Insurance Programme (MIP). Previously, properties with value at or below HKD6m were eligible for the maximum MIP cover of 90% LTV, but, after the revisions, only mortgage loans of properties with value at or below HKD4m are now eligible for that maximum.
Properties with value above HKD4m and below HKD4.5m are now eligible for MIP cover up to HKD3.6m, being 80-90% LTV; while properties with value at or above HKD4.5m are only eligible for a maximum MIP cover of 80% LTV. The cap on the value of properties under MIP will remain unchanged at HKD6m.