Anti-Anti-Speculation Action

As if to slap the Tsang administration in the face, two auctioned lots in urban Kowloon have just been sold at record high prices. This property bubble appears destined to be blown bigger before the inevitable happens. Before the bursting point though, developers will have had

sufficient time to rake in another round of fat profits on current sales projects.

The harshest of the anti-speculation measures is perhaps the prohibition of confirmor sales (i.e. resales before the completion of flats) in the primary market. Such a measure is not new – it was implemented once in 1994 under Chris Patten. At that time, other than having a short-time psychological effect on the market, the resale prohibition rule did not seem to be particularly effective at curbing speculation. If history is any guidance, such a rule would be quite useless in an environment filled with bullish sentiments and flush with liquidity, as was the case in the mid-90s. Irrational exuberance of speculators did trump government’s curbing measures. In the present circumstances where the incessant inflow of mainland funds is the chief cause for hefty price inflation and where the economy is doing extremely well, the measure would hardly be threatening to speculators with strong holding power and a bullish outlook, particularly those with a conviction that the government will soon run out of solutions to rein in the market

Just sidetracking for a moment, some critics seem to think that government has no legal grounds to prohibit confirmor trading, which is in effect a trading of the property’s “title option” (“業權期權”), and it is equivalent to the trading of options in financial markets. They are of the view that a title option is one kind of financial option, the trading of which should not be disallowed as a matter of consistency. But government does have legal grounds to regulate confirmor trading. For sales of uncompleted developments (called “pre-sales”) that are built on publicly auctioned or tendered lots or lots with renewed leases, a developer has to apply for a document called “pre-sale consent” from the Legal Advisory and Conveyancing Office (“LACO”) in the Lands Department under what is called the “Consent Scheme”, which is meant to regulate sales of developments that are still under construction and to protect purchasers. LACO has the authority to approve/disapprove the terms of the sale and purchase agreement and impose conditions as it thinks fit under prevailing circumstances. Prohibition of confirmor sales could be one of such conditions.

Back to the question of whether the prohibition of confirmor sales could dampen the overheated property market, the answer is, for reasons stated above, an emphatic “No”, particularly if it is implemented as a stand-alone measure. The ban means nothing more than for speculators to sit on profitable investments for a while longer. The still surging market will likely allow them to reap even higher gains. Developers’ defiant market-bolstering actions will ensure a continuation of the current uptrend, at least for a while yet.

But if the ban is coupled with levying a special stamp duty (in addition to the regular stamp duty) on all short-term property trading, plus a ban on using shell companies in property transactions (which incidentally was one of the curbing measures used in 1994), then not only would it douse the speculation fire in the primary market, but it would also deter speculation in the secondary market. The special stamp duty has to be set at a punitive rate for it to have any desired effect. The idea is to take out all the incentive in property flipping. Administratively, this is the simplest and most direct way of dealing with speculation. By cutting into speculative gains, the special stamp duty will hit where it matters. The point is: will the Tsang administration have the gumption to do such a thing?

As for the other measures like lowering the mortgage percentage from 70% to 60% for properties valued at HK$12 million or above and for non-self-use properties, and the standardized requirement for mortgage repayments not to exceed 50% of home purchasers’ monthly income, these look more like measures to safeguard the banking system in case the market turns bad, than effective speculation dampeners. People who can still afford to play in this market are most likely very loaded, and taking out a 60% instead of 70% property loan would do little to deter them.

About the sales tactics guidelines issued earlier that are aimed to censure unruly developers, they seem pale and trivial when set against the fact that home buyers have long been shortchanged on the floor area of the units that they use a big portion of their life savings to purchase.

Take the case of the two urban Kowloon lots just sold: the land cost per square foot of buildable gross floor area (i.e. the gross floor area that is permitted to be developed under the Conditions of Sale) would be about HK$10,000, but when the developments are sold, that land cost per square foot would come down to about HK$8,000, after taking into account of a 20% to 30% “inflation” in the gross floor area that is actually sold. Such unethical practice has been the invisible profit booster for developers, who have shown in recent years more and more disdain for consumers. Is it so difficult to regulate and standardize the “on sale” gross floor area of properties sold in the primary market? Why has government always avoided tackling this issue? Readers probably already know the answer.