I thought it would be useful to start off with an excerpt from a weekly economics e-letter by John Mauldin, an American financial expert, who writes brilliantly on US and international economic issues.
Every year, the Darwin Awards are given out to honour fools who kill themselves accidentally and remove themselves from the human gene pool. The 2009 Award went to two bank robbers. The robbers figured they would use dynamite to get into a bank. They packed large quantities of dynamite by the ATM machine at a bank in Dinant, Belgium. Unhappy with merely putting dynamite in the ATM, they pumped lots of gas through the letterbox to make the explosion bigger. And then they detonated the explosives. Unfortunately for them, they were standing right next to the bank. The entire bank was blown to pieces. When police arrived, they found one robber with severe injuries. They took him to the hospital, but he died quickly. After they searched through the rubble, they found his accomplice. It reminds you a bit of the immortal line from the film The Italian Job where robbers led by Sir Michael Caine, after totally demolishing a van in a spectacular explosion, shouted at them, “You’re only supposed to blow the bloody doors off!” – mauldineconomics.com
Mr Mauldin used the story to illustrate central bankers’ attempts to reflate the economy but got more than they bargained for in the process.
Here, in Hong Kong, recent policy mandates introduced by the Government in the name of cooling a red-hot property market that has been on a tear since the doldrums of 2008 could have the sort of unintended consequences that would undermine our ability to compete more effectively. Instead of just taming unwanted market gyrations (or only blowing off the doors), we run a real risk of losing our hard-earned reputation as a laissez-faire economy (blowing up the entire bank and ourselves along with it).
Make no mistake, the Administration’s resolve to act decisively to combat market exuberance and suppress speculation in the property market is applaudable. After all, homeownership is a common aspiration amongst Hong Kongers and the quantum-like leaps in property prices within a short space of time simply does not sit well with such goals.
Through its ‘Shock and Awe’ tactics of rolling out a series of stamp duties– the Special Stamp Duty (SSD) in 2010, the Buyer’s Stamp Duty (BSD) in 2012 and then the Double Stamp Duty (DSD) in 2013 – the Government has showed that it means business in confronting a market that is fuelled by historically low interest rates, excess liquidity and keen buying interest from across the border.
According to the Government, the introduction of SSD and BSD were extraordinary measures needed to address exceptional circumstances in the property market for the purpose of ensuring a healthy and stable development, which was crucial to the sustainable development of Hong Kong as a whole. The measures were also intended to safeguard the interests of Hong Kong Permanent Residents by asserting their priority on housing needs over non-Permanent Residents.
As expatriates and the international business community continue to struggle with the implications of a sea change in what was the SAR’s long-standing attitude of providing a level playing field for all, the Government heaps further controversy on its market-cooling measures by introducing a DSD applicable to both residential and non-residential properties.
It is difficult to understand the rationale behind the Government’s decision to extend the scope of its bubble-deflating measures to include the non-residential market. If it is to bring down the cost of doing business through the moderation of what it perceives to be unreasonably high prices, the outcome would be diametrically opposed to what is intended. DSD would actually add to the cost of doing business in two ways: first, by pushing those who wish to buy but are deterred by these taxes into the rental market, thereby increasing rental demand and thus raising the cost of operations; and second, over the longer term by raising both rentals and purchase costs from landlords trying to recover their acquisition outlays.
Although the sweeping application of DSD is to, ostensibly, stem or even pre-empt the possibility of speculative capital being redirected away from residential to non-residential premises, this however has the undesirable knock-on effect of also penalizing corporate owner-occupiers and long-term investors.
It is perhaps instructive to note that in Singapore where Stamp Duty on the sale of industrial property was introduced in 2013 to curb short-term speculation, the Authorities there adopted a regressive approach very similar to the design of Hong Kong’s SSD – a 15% Seller’sStamp Duty is levied if anindustrial property is sold within the first year; 10% if sold in the second year; 5% in the third year and no stamp duty beyond that.
Although the business community including SMEs would rather that the DSD amended to exclude non-residential real estate, the Singapore approach may offer a viable alternative of achieving the Government’s objective of stamping out short-term speculation while addressing the tenancy/acquisition needs of genuine owner-occupiers and long-term investors.
Shirley Yuen
CEO of the Hong Kong General Chamber of Commerce
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