Outlier in property
Nicholas Spiro says the city’s move to scrap long-standing cooling measures is a breath of fresh air at a time when other markets are turning inward
Property markets are not just sensitive to movements in interest rates, they are also influenced by domestic politics and geopolitics. It is rare that a government increases the incentive for foreign investors to purchase residential real estate, especially as housing affordability is a hot-button issue.
Yet this was one step Hong Kong’s government took when it announced on February 28 that it was scrapping long-standing cooling measures to help arrest the decline in the city’s housing market. Additional stamp duties for non-permanent residents – which had already been halved to 7.5 per cent last October – were abolished, as were levies for those reselling their homes within two years.
The policy shift has already had a discernible impact. Last month, mainland buyers accounted for around 70 per cent of the primary sales of luxury properties worth HK$30 million or more, up from less than 50 per cent before the cooling measures were jettisoned, according to data from JLL. The property adviser says non-local buyers stand to gain the most.
This is not the case in other leading housing markets. Knight Frank, which monitors changes in rules and regulations that have implications for wealth flows and property markets, says shifts in policy are the biggest risk for international buyers of prime residential real estate in major cities around the world.
Canada has unexpectedly emerged as one of the most strictest nations when it comes to foreign ownership of property. In February, the government extended a ban on non-resident purchases of residential real estate that was set to expire at the end of the year by an additional two years, amid signs the housing market has stabilised.
While the ban is part of a package of measures to improve affordability, the government said foreign ownership had fuelled worries about Canadians being priced out of housing markets and that housing should not become a speculative financial asset.
Canada’s government is contending with a backlash against immigration. The country’s population is growing at its fastest pace since the late 1950s, exacerbating the lack of affordable housing, especially in large cities. Yet at least the ban includes exemptions for permanent residents as well as foreign students and temporary workers, provided they meet certain criteria. Moreover, it stems from legitimate concerns about affordability.
The same cannot be said for legislation passed by several US states banning citizens from certain countries from buying homes in many areas. The most restrictive law took effect last July in Florida, only to be blocked in February when a federal court sided with two Chinese immigrants who sued the state. The Asian American Legal Defence and Education Fund said the law was “racist” and “steeped in a history when Asians were ineligible for citizenship”.
Other governments have raised taxes on foreign homebuyers. Last December, Australia tripled foreign investment fees for purchases of secondary homes and doubled vacancy fees for all foreign-owned dwellings bought since 2017. Singapore took harsher measures last April when it doubled extra stamp duties for non-residents buying their first and subsequent homes to a staggering 60 per cent.
However, the impact of inflows of foreign money on housing affordability warrants scrutiny. While outright bans on non-resident purchases are uncalled for, measures to curb speculation by both foreign and domestic investors are often necessary.
Even successive rounds of cooling measures in Singapore did not prevent prices from surging during the Covid-19 pandemic because of the city state’s safe haven appeal, especially among mainland Chinese buyers. “Without the curbs, prices would have risen more sharply. Being a safe haven is a double-edged sword,” said Alan Cheong, executive director of research and consultancy at Savills in Singapore.
Yet at least Singapore can rely on its wellestablished public housing system which houses over 80 per cent of Singaporeans. In Canada, by contrast, less than 5 per cent of housing is publicly owned. Vancouver and Toronto, which have been magnets for migrants and safe-haven flows, have borne the brunt of the deterioration in affordability.
Several factors are at play. What is undeniable is that prices in Vancouver grew more sharply compared with the average growth rate in Canada’s other cities in 2014-16, just when a portion of the surge in capital outflows from China made its way into Vancouver.
Academic research by Josh Gordon, an analyst at Statistics Canada, showed that Chinese capital flight “helped generate a relative overvaluation of 30-40 per cent” in Vancouver home values. Yet after the imposition of a foreign buyer tax and a speculation and vacancy tax in 2016 and 2017, respectively, the ratio of average prices in Vancouver to the average for other Canadian cities returned to its historical norm.
Of course, tax and macroprudential measures in housing markets are just one of several factors influencing affordability. Supply constraints are equally important, and perhaps more so.
This is particularly true for Hong Kong. Scrapping cooling measures is one thing, but preventing another supply crunch is quite another. The record number of failed land tenders last year has raised concerns about land creation and housing construction. “If development projects do not go ahead, we could be facing another cycle of shortages in the medium term,” said Hannah Jeong, head of valuation and advisory services at Colliers in Hong Kong.
Still, Hong Kong’s government has taken steps to attract foreign homebuyers. While it had little choice given the depth of the downturn, it deserves credit for adopting a contentious policy at a difficult time for housing markets the world over.