CHINA – New steps by Hong Kong to cool its local residential property market will work to drag down speculative and investment demand, with effects particularly noticeable in primary residential projects, according to property consultants Knight Frank.

The government has imposed an extra 15% buyer's stamp duty (BSD) on non-permanent residents and local and foreign companies buying homes in Hong Kong.

Thomas Lam, the firm's director and head of research for Greater China, said the policies could effectively drag down demand from speculators and some investors for buying residential properties in Hong Kong, with increased policy risks and investment costs.

This would be particularly apparent in primary residential projects where significant amounts of buyers are companies or mainlanders, he said.

As well as the additional BSD levy, the existing special stamp duty (SSD) is being extended for another three years in Hong Kong.

Rates for this tax are to rise to 20% from 15% for resell within six months of purchase, to 15% from 10% for resell within 6-12 months and to 10% from 5% for those reselling within 12-36 months.

The measures are aimed at stabilising the sharp rise in local housing prices.

Knight Frank said the government was targeting market equilibrium when the projected supply of 65,000 homes came onto the market over the next 3-4 years.

This represents an annual supply of around 20,000 units, which will meet housing demand, considering an annual average take-up of around 20,000 primary units in the past 20 years, according to official statistics.

As developers face decreased demand, Knight Frank predicted they would become less aggressive in setting the asking prices for pre-sale residential units.

Developers would need other marketing strategies to attract buyers by helping them absorb the extra stamp duty payments, it said.

In the short term, the firm predicted residential deal volumes would plunge, with potential buyers and sellers taking a wait-and-see approach.

Lam forecast total residential sales would reach only 65,000 in 2012, down from 84,000 last year.

Residential price movement would be very uncertain, he said, and the leasing sector was likely to stay positive because of demand from those putting off buying.

Some speculators could shift their focus to other property sectors such as commercial and industrial, Lam said.
But he added that, once the market had absorbed the negative impact of the new policies, buyers could come back.

These buyers could include people with real housing needs and some speculators, particularly those from the mainland, who still view Hong Kong as a safe haven, he said.

But he warned that the latest levy increases might not be the last.

"The government, which is determined to suppress surges in local home prices, could launch further cooling measures should home prices see significant upward movement again," he said.