Doomed to Fail

January 13, 2011

In less than two months after the government introduced a series of anti-speculation measures, the property sales market resumed its activities back to the level before the measures took effect. The government had hoped to rein in the runaway property price by levying punitive stamp duty on property resale within two years of purchase, ranging from 5% to 15% of transaction value depending on the time of disposal. It cited property speculations (mostly in the form of “confirmor sale”) as the culprit of high price and determined that the extra stamp duty would stamp out speculative activities, and therefore would contain price hike.

Apparently the measures failed. The market has shrugged off the effects within a short time. Why? Because the government had misjudged the market. The main driving force behind price hike in recent years includes extremely low cost of borrowing, a chronic shortage of housing supply, robust economic recovery of Hong Kong and China, surge of hot money and strong demand from locals, mainland Chinese and affluent expatriates. Confirmor sales represented less than 2% of total sales, and even less in the luxury sector. It is true that speculations in the market have ground to a halt. But has price hike been reined in? No, definitely not.

The main factors contributing to high property price are still there, and there is another factor coming into play. This is inflation, which is looming large. The worldwide quantitative easing has created huge hot money flows, which chase assets including real estate. Asia being a main destination of the money flow has absorbed more than its fair share of the surplus cash. Hong Kong is among the hot spots to where money flows. To counteract inflation brought about by surplus money, a traditional and effective way is to raise the interest rate. However, Hong Kong Monetary Authority has its hands tied up because of its peg to the US dollar. And Federal Reserve will not raise the interest rate any time soon in an effort to jump start the US economy. The result is that inflation will quickly build up its momentum and become rampant in the years to come. The consumer market is already feeling the pinch. The anticipation of high inflation and the next-to-nothing deposit rate have combined to spur property investment demand. Even if the government increases land supply now, it won’t quench the thirst for another three years before buildings are completed. As we pointed out in last month’s market commentary (“The Culprit of High Property Price”), the government is largely responsible for the rampant price surge since 2005 because of its high land price policy. So the anti-speculation measures introduced in last November is doomed to fail. Looking ahead, we expect sales activities will continue to be buoyant and price will continue to escalate.

By Koh Keng-shing