PRESS RELEASE

LCQ6: Measures to curb speculation on residential properties

*******************************************************************

Following is a question by the Hon Lee Wing-tat and a reply by the Secretary for Transport and Housing, Ms Eva Cheng, in the Legislative Council today (November 24):

Question:

With the appreciation of Renminbi, the low interest rates maintained by the Federal Reserve of the United States and its implementation of the second round of quantitative easing monetary measures, the market expects that these factors will trigger a massive inflow of hot money into Hong Kong, which will be invested in the residential property market and fuelled property speculation further. In this connection, will the Government inform this Council:

(a) how the authorities will quantify the impact of the aforesaid situation on Hong Kong's residential property market;

(b) whether the authorities will adopt the following measures to combat residential property speculation:

(i) requiring banks to progressively scale down the loan-to-value ratio for the second or more residential flats purchased by property owners, or to progressively scale up the lending rates for these owners; and
(ii) conducting studies on measures taken by other countries to restrict non-citizens from purchasing local residential properties; and

(c) given that as at the end of last month, the authorities have already completed the examination of 3 600 suspected property speculation cases, how many of these cases involve property sales by individuals and companies respectively; and among such cases, the respective number of those which involve property sales by overseas individuals or overseas registered companies; how the authorities will levy taxes on profits generated from property speculation through overseas transactions or changes in shareholdings by these individuals or companies; and when the authorities will complete the examination of the remaining 700 suspected property speculation cases?

Reply:

President：

(a) The Government has been monitoring the development of the private residential property market closely and remains vigilant on the risks of a property bubble. In February, April, August and October 2010, the Government introduced various measures in four areas to ensure the healthy and stable development of the property market. These included setting the target of ensuring that in the next 10 years there would be land made available for provision of an average of about 20 000 private residential flats and about 15 000 public rental housing flats, increasing the supply of small and medium sized flats through various means, increased the stamp duty for property transactions valued more than $20 million from 3.75% to 4.25%, disallowed deferred payment of stamp duty for residential property transactions valued more than $20 million, disallowed confirmor transactions for first-hand uncompleted flats approved for pre-sale on or after August 13, 2010, introduced the "nine new measures" for enhanced transparency on sales brochures, price lists, show flats and transaction information, set up the Steering Committee to discuss specific issues on regulating the sale of first-hand private residential properties by legislation and come up with practical recommendations by October 2011, applied a maximum loan-to-value ("LTV") ratio of 60% to properties valued at or above $12 million, and standardised the limit on debt servicing ratios ("DSRs") of mortgage applicants to 50% and with a stress test cap at 60% DSRs.

The above measures are taking effect, but owing to extraordinary external factors, the private residential property market is still very exuberant. Overall flat prices in September 2010 have risen by 15% over December 2009, equivalent to a hefty increase of 22% over the 2008 peak. In September 2010, overall flat prices were merely 11% below the 1997 peak, and prices for large flats (larger than 100 square metre in saleable area) were already 10% higher.

More worryingly, the exuberant state of the property market has spread to the mass market. There is a surge by 32% in the number of resale within 24 months in the first nine months of 2010 as compared with the same period in 2009. Within the total, the number of resale within 12 months surged by an even more rapid 114%, indicating a shift in speculative activities to a shorter horizon. Also, there is a higher incidence of short-term resales in the lower end market, with 84% of the short-term resale within 12 months in the first half of 2010 being transactions below $3 million.

With the announcement by the US Federal Reserve on the launching of the second round of "quantitative easing" amounting to US$600 billion in November 2010, more funds are expected to flow to the emerging markets, in particular Hong Kong, given the strong economic fundamentals and absence of capital control here. The abundant liquidity and ultra-low interest rates will thus continue for an extended period, and the risk of a housing bubble has thus intensified further.

(b) Taking into account these developments, the Government considers it necessary to introduce further measures to curb speculation, manage the risk of the development of property bubble and ensure the healthy and stable operation of the property market. To this end, the Financial Secretary announced the following new measures on November 19 this year, they are

(I) First, introduce, on top of the current ad valorem property transaction stamp duty, a Special Stamp Duty ("SSD") on residential properties of all values at the point of resale if the properties are acquired on or after November 20, 2010 and resold within 24 months after acquisition, including confirmor transactions. The SSD will have three levels of regressive rates for different holding periods

(i) 15% if the property has been held for six months or less;
(ii) 10% if the property has been held for more than six months but for 12 months or less; and
(iii) 5% if the property has been held for more than 12 months but for 24 months or less;

We propose that both the seller and the buyer, be it an individual or a company (listed or unlisted, and wherever incorporated), will be held jointly and severally liable for the SSD.

We propose to grant exemptions to the following, namely nomination of a close relative (i.e., spouse, parent and child) to take up the assignment of the property and resale or transfer of the property to close relatives, transfers between associated companies, transfers of the properties of deceased persons by will or by law to the beneficiaries, sale of properties due to bankruptcy/involuntary winding up, and sale of properties to Government.

We have to amend the Stamp Duty Ordinance (Cap. 117) to implement the SSD. Before the coming into effect of the new law, the Inland Revenue Department ("IRD") will record all the residential property transactions between 20 November 2010 and the date of coming into effect of the new law to identify the cases liable for SSD. Demand notes on SSD will then be issued after the new legislation is enacted. We have drawn the attention of the public, the Estate Agents Authority, the Law Society of Hong Kong, and the major estate agency associations to the aforementioned arrangement.

(II) Second, disallow deferred payment of the current ad valorem property transaction stamp duty for all residential property transactions valued at $20 million or below. We have already disallowed deferred payment of stamp duty for residential property transactions valued more than $20 million with effect from April 1, 2010. This means that the stamp duty of all transactions cannot be deferred and has to be paid within 30 days after the signing of the Agreement for Sale and Purchase.

We have to amend the Stamp Duty Ordinance (Cap. 117) to disallow deferred payment of the current ad valorem property transaction stamp duty for all residential property transactions valued at $20 million or below. In the meantime, IRD will continue to allow and approve applications for deferring stamp duty payment on agreements made in accordance with the prevailing legislation until the new law comes into effect.

The objectives of the above new measure relating to stamp duty is to target at short-term property speculators by substantially increasing the costs of speculative activities, with the aim to curb speculation. Genuine home buyers and long-term investors should not be affected by these measures.

Besides, the Hong Kong Monetary Authority ("HKMA") announced on November 19, 2010 further measures to enhance risk management in mortgage lending by banks in Hong Kong. The new measures are

(i) Lowering the maximum LTV ratio for residential properties with a value at HK$12 million or above from 60% to 50%;

(ii) Lowering the maximum LTV ratio for residential properties with a value at or above HK$8 million and below HK$12 million from 70% to 60%, but the maximum loan amount will be capped at HK$6 million;

(iii) Maintaining the maximum LTV ratio for residential properties with a value below HK$8 million at 70%, but the maximum loan amount will be capped at HK$4.8 million; and

(iv) Lowering the maximum LTV ratio for all non-owner-occupied residential properties, properties held by a company and industrial and commercial properties to 50%, regardless of property values.

Moreover, in the guidelines issued on August 13, 2010, the HKMA reminded authorised institutions ("AIs") that in cases where information provided by an applicant reveals that he or she already has existing mortgages or is applying for other mortgages, the AI concerned should take into account the borrower's total debt repayment obligation in computing his or her debt servicing ratio.

The Government has considered the proposal of banning non-Hong Kong residents from buying flats in Hong Kong. However, such proposal will bring about a very fundamental change to our system, and will affect the status of Hong Kong as one of the freest market economies in the world, and undermine the confidence of overseas companies or investors' in Hong Kong as a global financial centre and preferred place for doing business with its so far consistent policies in enabling free flow of capital and barrier-free environment for investment. This will have read-across implications on the overall economy of Hong Kong.

We believe that the expectation on the property market will be changed because of the newly introduced measures. With diminished prospect for quick profits from speculating in the property market, there will be less speculation in different forms.

To ensure the healthy and stable development of the property market, the Government will continue to closely monitor the development in the property market, and will introduce further measures when necessary.

(c) Hong Kong adopts a territorial source principle of taxation, and strives to maintain a fair taxation system. Basically, Hong Kong residents and non-residents are treated alike.

Under the Inland Revenue Ordinance (Cap. 112), any person, regardless of her residency, carrying on a trade, profession or business in Hong Kong is chargeable to profits tax on his profits arising in or derived from Hong Kong, excluding profits arising from the sale of capital assets.

Property speculators are regarded as carrying on a trade and are subject to profits tax under the above-mentioned provisions. IRD has been following up closely the property transactions entered in names of individuals or companies, or through the transfer of shares in property holding companies. The Department enforces the law and collects profits tax from these individuals and companies. As transfer of Hong Kong properties or Hong Kong company shares is subject to stamp duty regardless of where the transaction takes place, IRD will identify property dealing transactions for follow up actions when examining the relevant documents presented for stamping.

In 2008-09, IRD identified with the aid of computer programmes 13 700 suspected cases of property dealing for follow-up. They include cases involving individuals, partnership businesses and corporations with no existing profits tax files. After an initial review by IRD officers, 4 300 cases were found to require further follow-up actions.

Up to the end of October 2010, IRD completed 3 600 cases, including 2 600 cases of individuals, and 1 000 cases of corporations and partnership businesses. The remaining 700 cases were being processed. Having said that, IRD has not specifically collected or analysed how many of these cases involve overseas persons or companies.

In assessing these cases, IRD officers have to examine each suspected property dealing transaction and collect the relevant information from the taxpayer and third parties. They include the background to the transaction, the motive, the financial arrangements entered into, the mode of operation, the frequency of transactions, the length of the holding period etc. Based on the relevant facts, IRD officer will determine whether the transaction amounts to a speculative activity in the nature of a trade.

The procedures and time required to collect the relevant information and to verify the facts could vary considerably from case to case. Hence, while the Department will closely follow up all cases, it is not possible to estimate precisely the amount of time needed to complete the remaining 700 cases.

Ends/Wednesday, November 24, 2010
Issued at HKT 17:06

NNNN