Written By: Jocelyn Cheung
The Rating (Amendment) Bill 2019 was gazetted on the 13 September 2019. This Bill aimed to discourage developers from hoarding newly built units and to ease the housing shortage problem in the long run.
Under the Bill, if a first-hand private residential unit remains unsold for 12 months after it is completed, the developer will be subject to a vacancy tax unless the unit is rented out. The tax would be a flat rate of 200%, double that of the unit’s estimated annual rental value.
Prima facie, this proposed vacancy tax brings about a positive short-term impact on the local housing market. Since the introduction of the bill, Hong Kong’s home sales has surged to a 6-month high in November in 2019. From the statistics extracted from the land registry, the overall residential transaction has a 44% month on month increase and new home sales surged 54% month on month. To illustrate further, in New Territories, there is a 200% increase in the sale of new homes in November, this is mainly due to the sale of more than 500 new flats in The Grand Marine Project in Tsing Yi. In the comparable period, there is a 187% increase in the sale of new home in Hong Kong Island, while there is a 29% decrease in Kowloon.
Prices of housing units are driven by the market forces. Since developers would want to speed up flat sales to offload vacant housing units, they are motivated to reduce the asking price of the housing units while providing other incentives such as financing schemes. This can be illustrated by the Seaside Sonata project in Cheung Sha Wan. It was priced at 10% lower than The Addition, which was launched in March this year in the same neighbourhood.
Theoretically, if developers would want to avoid the proposed vacancy tax, there will be a one-off surge in the flat supply with lower selling price. However, many long-term factors are affecting Hong Kong’s housing market such as the city’s economic situation, developers’ powers and the city’s political situation. In reality, the proposed vacancy tax does little to increase housing supply and by extension, housing prices.
Second-hand owners, in aggregate, hold the most unsold units (around 80% of all unsold flats). Therefore, even if all developers-owned unsold units were sold, it would not be enough to materially impact broader prices considering that they only constitute 0.8% of the market. Since supply is not enough to satisfy the demand, prices will not significantly go down.
The root of the housing problem is not unsold flats, but the chronic shortage in housing supply. Even if developers choose not to hoard the flats due to the newly imposed vacancy tax, prices are unlikely to decrease. Housing demand helps developers to clear their unsold stock at high prices. An example of this would be New World Development, which sold two-third of its units in Park Villa and did not reduce their selling prices. The key issue in the Hong Kong’s housing market is the lack of supply, the proposed vacancy tax merely used developers as ‘sacrificial offerings’. If housing supply continues to fail to keep up with demand, there will be no incentives for developers to reduce their selling prices to attract consumers. Even if it succeeds in increasing housing supply in the short term, it is only a one-off effect. The vacancy tax cannot have a sustainable effect on housing supply, which must be based on a bigger flow of housing completion.
Sources: Hong Kong Task Force for Land Supply
The vacancy tax not only cannot increase that, but also may reduce it. Sr Chan adds, “The biggest issue we face is a sluggish second-hand market, so all demands go to the first-hand market, which is twisted and unhealthy. Many second-hand owners are not willing to sell because of the hefty stamp duty they incur. Indeed, it’s the biggest source of supply and plays a pivotal role. Imagine if there are one million private units and only 5 per cent of them are up for grabs on the market, it’s already 50,000 units, which outnumbers Government’s target supply of 19,000 new units per year. Government should consider on how to revitalise this market, i.e. an e-certificate to encourage owners to sell theirs and allow them to buy units after certain number of years with lower stamp duty.”
As suggested by Cecil Chao, chairman of Cheuk Nang Holdings, releasing the vacant units to the renting market is a safer option for developers to avoid the tax. This is because developers might find it difficult to immediately offload their vacant units. An example of this would be Sun Hung Kai. The developer is now offering new flats in Kennedy Town and in Central for rent.
Analysts from Goldman Sachs, Morgan Stanley and JPMorgan Chase said the latest move won't dent soaring prices. Most vacant units are high-value properties, which will definitely appreciate in the long run. Developers are willing to wait, and since these units tend to have lower rental yields, the proposed vacancy tax as a percentage of the property’s value will also be lower (Cusson Leung, JPMorgan Hong Kong Head of Property research).
Furthermore, the proposed vacancy tax place developers in a difficult position. Assuming that developers will sell or lease their units for cheaper due to the vacancy tax, property development will become less profitable. This creates a paradox where developers may build fewer new residential units and shift their focus to developments to industrials and commercial buildings. If the vacancy tax is effective at pushing developers to unload their vacant flats at more affordable prices, it will also deter them from building as many units as they can, which reduces the new supply that the Hong Kong housing market needs. Alternatively, the developers can just transfer the price to homebuyers. Considering the current distortion between supply and demand, developers have a stronger bargaining power. They can leverage on the strong levels of demand in the market to funnel the additional costs to buyers to offset the vacancy tax.
By proposing the vacancy tax, the government made an attempt to discourage developers from hoarding. However, taking into considerations of all the economic, political and social factors in Hong Kong, the proposed vacancy tax will bring about grave repercussions, causing unnecessary disruptions to the market. And thus, it can be concluded that the proposed bill fails to reflect the government’s true legislative intent.
Disclaimer: The opinions expressed in this post are those of the authors, and do not reflect the views or opinions of the Durham Asian Law Journal.