New cooling measures to defeat purpose soon

Developers seen to be more reluctant to sell over the next 2-3 months.

The headline increase (i.e. double stamp duty rate) sounds significant yet the said increased duty amount will be passed through onto the selling price over the medium term, as demonstrated by the new BSD / extension of SSD introduced last October, said May Bank KimEng.

After market closed last Friday, the Financial Secretary announced demand-side measures to the property market:

i) Stamp duty rate of property transactions will be doubled with effect from
February 24th (last Saturday), while the duty of transaction amount less than
HK$2m will be increased from HK$100 to 1.5% of the property value. The
range will increase from 1.5-4.25% to 3.0-8.5% (Figure 1).

ii) There are exemptions (to pay old rate) to HK permanent resident buyers who
does not own other properties in Hong Kong, or those who will sell their
existing residential units within 6 months of transaction (i.e. genuine
upgraders).

iii) The increased stamp duty will also be applicable to all other non-residential
properties with immediate effect.

iv) For non-residential transactions, buyers will have to pay the stamp duty
immediately after the signing of the Sales and Purchase agreement, rather
than payment upon the completion of the transaction. This measure now
aligns with the practice in residential market.

Separately, Norman Chan of HKMA announced that:

v) Stress test for the residential mortgage borrowers will be increased from 200
bps plus original mortgage costs to 300 bps plus original mortgage costs. The
affordability ratio of no less than 50% is maintained.

vi) The LTV will be cut by 10 ppts for commercial properties across the board.
Borrowers with income source in Hong Kong will have LTV cut from 50% to
40%. Borrowers with income source outside Hong Kong will have LTV cut
from 40% to 30%.

vii) For carpark bays transactions, the LTV is now standardized at 40% with a
maximum tenure of 15 years.

Here are the implications according to MayBank KimEng:

We believe that the unit transaction in the secondary market will lower over the next 2-3 months, as potential seller in the secondary market will be even more reluctant to sell.

Upgrader demand will be affected slightly with the 6-month grace period. Yet, the genuine home-starter buyers’ demand (i.e. first time home buyers not subjected to double stamp duty and with budget of cHKD4m) will not be
significantly affected, in our view.

Primary sales will also be impacted initially for a period of 1-2 months, similar to the case when BSD/SSD2.0 were being introduced in October 2012. Developers, which in general do not have strong urgency to push sales, will slower the pace in launching their projects, also similar to what has happened in Nov-Dec 2012.

As part of promotional tactics, selected projects may offer rebates to purchasers for extra stamp duty.

The over-heated non-residential property market is expected to cool down significantly. Note the fact that it is the first demand-side measure targeted to the non-residential property market, when it became the ‘safe haven’ post
BSD/SSD2.0 in last October, as demonstrated with strong carpark bay sales since then. Yet, as the maximum LTV for non-residential properties is capped at 50%, the marginal impact should not be as significant as low-end
residential units, in our view.

On a longer term basis, the target annual take-up of c25,000 units are still in excess to the annual supply of 13-15k from 2013-2015. Hence, we believe that the long-term property price uptrend will not reverse.

We maintain our view that residential property price in 2013 will rise by 5%. Centa-City Leading Index rose from 115.78 as at end Dec 2012 to February 17th’s 121.58, or 5%.