There's no stopping China's astronomical growth in housing costs, but the government will do what it can to clamp down on rising prices. On Thursday, four cities including Hong Kong came up with new rules designed to restrict real estate purchases.
In Hong Kong, the government is being asked to shut down a tax loophole for first time home buyers. The current tax regime has led to a sharp rise in first-time buyers purchasing multiple properties at once in order to get the tax benefits. Law firms have suggested the government take action in order to cool one of the three hottest housing markets in the world.
Chinese buyers are getting creative with individual investing structures used to buy multiple transactions under one buyer. The Hong Kong tax authorities apparently consider that one transaction and taxed accordingly. The South China Morning Post published in a story today that at least 420 sales and purchase deals on 950 flats involved registered single buyers who all acquiring more than two units.
A local Chinese language paper called Ming Pao reported that one customer bought 15 units for more than $18.6 million in a single transaction. If this person was a first-time buyer and owned no other properties, he or she would have paid 4.25% in taxes instead of 15%. So savvy and rich Chinese buyers are abusing the tax law and gobbling up real estate, driving up prices.
Hong Kong raised real estate transaction taxes to 15% in November for corporate buyers. Non-first-time individual buyers have fueled the rising number of sales, caused by these investors who are creating bundling structures under one housing purchasing agreement. In the case above, it's 15 for the tax price of 1. The South China Morning Post said that lawyers want all home buyers to pay double tax on their first purchases, with only some qualified first timers allowed the exemption.
On the mainland, three cities are now "banning" second home purchases.
See: Shanghai Housing Worse Than Manhattan? -- Forbes
Hangzhou, Xiamen and Fuzhou cities announced new measures this month to restrict housing purchases to cool their property markets.
Hangzhou has been the most punitive. The city basically banned single adults — including those who are divorced — who have a local household registration record (hukou) and own at least one house from buying new apartments in the city. Business entities can not sell out of the property within the first three years. People who hold a hukou permit must show evidence of living in the city for more than two years before buying a property.
In addition to that, the minimum down payment has gone up from a previous number of around 20% (national average) to a whopping 60% in this city of seven million inhabitants. Those who have no home in Hangzhou but have a mortgage elsewhere will be considered second-time home buyers.
Similar restrictions have been introduced in Xiamen and Fuzhou.
China's real estate market has been hot for decades, but the last 15 years have really seen a rise in property values. coincide with rising incomes in the coastal cities. China's government has exacerbated the problem by making it difficult for wealthy and middle class Chinese to invest their money off the mainland. Recently, China has opened its capital account to allow for more money to leave China. And its two mainland stock exchanges are now connected to Hong Kong, providing easier access for mainland investors who want to diversify into Hong Kong dollar denominated securities. Stocks in Shanghai and Shenzhen are highly volatile, with the market viewed more like a casino there than it is in Hong Kong. This volatility, coupled with China's relative ban on capital flight, has made real estate the investment of choice for wealthy Chinese. Moreover, a one-child policy in China has given older Chinese more money to share with their child, creating generations of a new monied youth that started off in life with their own house. With more money than they've had in a generation, rich Chinese are buying up properties as a store of value, even if the home is left vacant.
