Hong Kong’s Tax on Unoccupied Apartments Is Unlikely to Reduce Property Prices

Hong Kong’s Tax on Unoccupied Apartments Is Unlikely to Reduce Property Prices

Hong Kong’s plans to impose a tax on unsold new apartments will probably not have a big effect on the hot housing market in the city. The levy was announced as part of a wider effort to boost supply in the world’s most inaccessible property market. But analysts from Goldman Sachs, Morgan Stanley and JPMorgan Chase say that the new tax will not stop the price increase.

Cooling the property boom in Hong Kong is one of the biggest challenges, which the local authorities are facing. They had announced a series of measures to cool the market, but failed, as the demand grew before chronic housing shortages led to a rise in prices of more than 50% over the past five years.

According to the new rules, the apartments that remain unsold for more than six months will be subject to a tax, which is equal to twice the annual rental income or about 5% of the value of the property. According to the analysts, this is a rate that entrepreneurs can easily handle.

“The absolute level of tax seems to be relatively manageable”, said Goldman Sachs Group analysts, who compared relatively low costs to annual price volatility.

“Since most unoccupied properties are of high value, the rental yields are lower, so the tax, as a percentage of the cost of the dwelling, will also be lower”, considers JPMorgan Chase’s property and conglomerate research department in Hong Kong.

“The tax is lower than in Singapore, which starts at 4% if the apartment is unoccupied for two years after its completion and increases to 12% if it is unoccupied four years after construction ends”, adds analysts of Morgan Stanley.

The new tax must be approved by Hong Kong’s MPs, which will give entrepreneurs six to nine months to sell the unoccupied apartments.

About 66% of the total 9,000 vacant homes in the primary market were completed since 2017. The entrepreneurs may not have to sell them as fast as the government expects. The entrepreneurs with more homes available for sale may be under pressure in short term, but housing sales will increase their cash flow and improve their balance sheet in medium term.

In Hong Kong, the entrepreneurs typically sell the apartments as soon as possible because their main concern is to recover the funds and buy more land. The unsold stocks consist either of luxury apartments, which are harder to sell, or of housing in an area where land supply is limited.

“The tax on uninhabited housing can have a minor impact. In most cases, its application will not be necessary”, says JPMorgan Chase.

However, according to the experts, the introduction of a tax on uninhabited housing will not affect the entrepreneurs’ sales strategies.