New Hong Kong Tax Will Push Developers to Build Smaller Units
According to JLL's mid-year 2018 Hong Kong property forecast, the upward march of housing prices will slow in the second half after the Government introduced a new vacancy tax and restrictions on the Pre-sale Consent Scheme. Still, housing prices are likely to go up a further 7% in coming six months. To safeguard sell-through rates, developers will likely build smaller flats. The average size of new flats has already decreased by about 40% over the past 6 years.
Smaller units, more affordable pricing and developers' financing have contributed to strong sales in the primary market in the first half with developers being able to sell over 50% of units launched at most new projects.
At the end of June, the Government announced six new initiatives to address the city's housing woes. Among these was the much speculated vacancy tax for the primary market. According to Transport and Housing Bureau, there was an estimated 9,000 vacant units in the primary market at the end of 2017. The number of vacant units in the primary market as a proportion of all vacant units in the market has increased from 8% in 2012 to 21% in 2017.
In response, developers will likely build smaller flats to mitigate the additional development risks arising from the new tax. This will keep lump sums affordable and help safeguard sell-through rates. The average size of units under construction has decreased by 40% from 1,022 sq ft in 2013 to 600 sq ft so far this year.
The Government's decision to introduce additional initiatives to address the city's housing issues at a time when interest rates are rising and the current market cycle is already in its latter stages comes with risks. When the market does turn, all these cooling measures introduced in recent years could exacerbate any downturn, leading to a market freefall. Moreover, an increasing number of buyers have been relying on developer financing, which charges higher interest rates and require no stress test on buyers. In a market correction, developers could also be in trouble given high holding costs associated with vacancy tax. Under these circumstances, the government should assess these cooling measures carefully.
In April, the Land Supply Task Force--a group set-up by the Government to address Hong Kong's long-term housing problems--released its report and recommendations on how to solve the shortage of land supply in Hong Kong. Amongst the suggestions was further land reclamation. Yet land reclamation can only provide 490 hectares of land supply and it will take a significant amount of time to have works completed and the land prepared for development. Joseph Tsang, Managing Director at JLL, suggested that the Government focus on unlocking the potential in the 760 hectares brownfield sites scattered around the New Territories, which the Government has yet to pursue. Brownfield sites will be a more effective and faster option for generating land supply than through land reclamation.
Tsang commented, "Under the new tax, developers will adopt a more cautious pricing strategy in new luxury launches to ensure all units are sold. Mass residential projects, on the other hand, are likely to be less affected given the sustained demand for smaller units. Developers are also likely to be less aggressive when bidding for sites in the future to offset the additional development risks brought about by the new tax. However, whether lower land prices will translate into lower housing prices will depend on prevailing market sentiment. Combined with the imminent interest rate hikes and increased volatility in equity markets, we expect the run-up in housing prices to ease in the second half after growing 8.6% in the first half. Still, housing prices remain on track to grow in the range of 10-15% for the full year."