Last week, the authorities in Hong Kong bowed to the inevitable and slapped a 15 per cent stamp duty on properties purchased by overseas buyers. With its currency tied to the dollar, and no capital controls or capital gains tax, Hong Kong has seen a dramatic influx of foreign wealth into its property market in recent years, causing house prices to surge. Average properties are valued at more than 17 times median household incomes. Now legislators have finally taken action to prick the housing bubble and discourage speculation.
The bursting of gigantic housing market bubbles in the US, Iceland, Ireland and Spain and their traumatic aftermath has distracted attention from asset price rises in Hong Kong and elsewhere in the world. Even within a gloomy global economic outlook, residential property markets have soared upwards since the financial crisis in a number of countries. Canada, Australia, Switzerland and Singapore have all seen strong price growth. In Europe, as capital flees from the distressed periphery, the wealthy have escaped austerity by ploughing into northern European property markets. And closer to home, the London residential market has seen rises of more than 5 per cent this year, as prime West End homes continue to attract the global super-rich.
When large run-ups in household debt precede the bursting of housing bubbles, the resulting contractions in economic activity tend to be severe, as a recent IMF study showed. Policymakers therefore have good reason to institute measures, such as property taxes, to take the heat out of asset price rises before they are forced to resort to emergency crisis responses, such as debt restructuring. (Although where mortgage debt has reached unsustainable levels, particularly for lower-income families, policies to enable households to deleverage may become necessary before steep price falls take place.)
In the UK, the Treasury has already introduced a 15 per cent stamp duty rate for properties acquired by foreign buyers through shell companies. It is consulting on a new ‘son of mansion tax’ annual charge for such properties which are valued at more than £2 million, as well as the extension of capital gains tax to non-naturalised sellers. These measures will generate useful, if limited, tax revenues and capture some windfall gains from the hot capital that has poured into London.
Policymakers have short memories, however. Where house prices remain out of reach of first-time buyers, as in London and the south east, political pressure to help people get on the housing ladder leads to the invention of homeownership subsidy schemes, such as the government’s New Buy programme. Ostensibly designed to kickstart housing markets, these schemes usually end up boosting sellers’ prices or developers’ bottom lines. At their worst, they encourage buyers into markets that leave them underwater on their mortgages when price corrections take place. It is perhaps a small mercy that only 250 homes have been bought using New Buy assistance.
Instead of blowing more air into housing bubbles, we need serious and sustained investment in bricks and mortar from institutional investors, local authority pension funds, and public resources switched out of rent subsidies. Loan-to-value ratios should remain constrained, even when the economy is back on a sustainable growth path, and attention should urgently be paid to helping over-stretched households to restructure their mortgages before interest rate rises kick in. Meanwhile, northern European governments should dig deep into their reserves of prudence, not to inflict further pain on the south but to head off the property bubbles blowing their way.