8 June 2018 - The government will soon conclude its study on the feasibility of imposing a vacancy tax on developers who hoard unsold first-hand private residential flats, Financial Secretary Paul Chan Mo-po told legislators in early June 2018. As at December 2017, developers have withheld 9,370 of such flats. Officials believe that a tax on vacant properties will help release residential units into the market to increase supply. As the government appears to move towards the introduction of a vacancy tax, OKAY.com CEO Joshua Miller discusses what it could mean for developers and consumers.
How will a vacancy tax impact developers and first-hand (new) supply?
When developers introduce new supply to the market, the prices of these properties should be driven by market forces. So, for example, if a developer is focused on selling quickly, they are incentivised to price properties lower (in addition to other incentives such as financing schemes). However, developers cannot always predict what the market’s reaction will be when they launch a new development. If the units are not selling well, it is difficult to reduce prices as this upsets early purchasers who often perceive the developer has “reduced” the value of their property. A good example is the riots that have occurred at developers’ offices in China when this has occurred. Furthermore, if prospective buyers believe that prices may come down if they wait, this discourages homebuyers from buying units released earlier.
Although the details of Hong Kong’s announced vacancy tax have not yet been announced, it will certainly put developers in a difficult position. To ensure that all their units get sold or leased, they will be forced to launch new developments at lower prices. How much lower depends on the severity of the tax, and the each developer’s view on how much demand exists for a new project.
While this may achieve the government’s objective in the short term, if it becomes effective immediately, it will be unfair to developers who still have unsold inventory or are about to launch new projects, since they invested and built those projects without the tax (and the lower prices) in mind.
Lower prices also reduce the profitability of future development projects, creating a paradox: if property development is less profitable, fewer new residential units will be built. Developers may even shift their focus to office developments. So a severe vacancy tax could end up reducing the new supply that Hong Kong’s housing market needs.
What about the second-hand market?
At the end of 2017, 42,942 units (3.7 percent of all 1,174,628 private flats) were vacant, of which 9,370 were unsold first-hand private residential units(1). This means approximately 80% of vacant units are in the second-hand market, held by individuals. If the government is trying to curb speculative holdings in the second-hand market by foreign owners, it could look to Australia’s vacancy tax policy, which targets foreign owners who leave their properties vacant for six months or more.
If the government does eventually choose to target the second-hand market, it should also clarify if it is primarily trying to reduce sales prices or rental prices. Second-hand property owners are often forced to leave their properties vacant for longer periods, as it is easier to sell a property if it is vacant and it can take a long time to sell. This is especially true now as a result of the government’s other cooling measures, which have greatly reduced sales volumes compared to previous levels. Rentals, on the other hand, generally become leased much faster, so a vacancy tax is unlikely to meaningfully impact the rental supply.
Who would benefit?
If the tax only applies to developers as has been announced, and it brings rental and sales prices down, then tenants and buyers will naturally benefit. However, this might cause problems with housing supply in the long run as developers could experience less incentive to build new developments.
If the government surprises us and the tax applies to both developers and second-hand property owners, it will impact individual homeowners (at least there would be no perception of unfairness. However, it still could hurt a handful of owners who choose not to rent out their homes for specific reasons, e.g. they live elsewhere in Asia and return to Hong Kong occasionally.
Would a vacancy tax really increase housing supply and reduce prices?
This is the real question. A tough stance and high tax policy that only applies to developers will naturally be a stronger stimulus for developers to sell their current projects at a lower price. However if this leads property values to drop significantly, buyers in the last several months may suddenly own units that are worth less than when they purchased them, creating significant disgruntlement. Longer term it may also dis-incentivize new developments as mentioned.
Also, the net impact on the total supply will be extremely small. Even if all the developer-owned unsold units were sold (at lower prices), these only constitute approximately 0.8% of the total market.
Only by imposing a broader vacancy tax on all owners of vacant properties can the government materially increase supply. This is what Vancouver has announced as described in a recent SCMP article. But it’s difficult to see this happening given the negative public reaction and political repercussions it would cause. The government’s other cooling measures have significantly reduced transaction volumes, increasing the length of time needed to sell. Pinning homeowners between the contradicting forces created by a vacancy tax and the existing cooling measures isn’t fair either. This may explain why the announced vacancy tax is only targeting developers.
So will a vacancy tax really increase supply and reduce prices? We won’t know until the details of the tax are announced, though it is difficult to see it having a substantial impact.
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