Budget Speech

The Risk of Asset-Price Bubbles

21.      Since the onset of the financial tsunami, a number of economies have introduced expansionary fiscal measures and eased their monetary policies, resulting in a surge in global liquidity. Large amounts of capital have been attracted into Asia, including Hong Kong, in a short period of time, stimulating investment activities in the asset markets. Since the fourth quarter of 2008, the amount of inflow of funds has exceeded $640 billion, increasing the potential risk of creating asset-price bubbles. We are also concerned that if capital flows were to reverse or interest rates rebound, asset prices would become more volatile. This in turn may affect the stability of our financial system and the recovery of the real economy.

22.      The increased risk of a bubble forming in the property market has also aroused public concern about the difficulty in buying homes. The inflow of funds has fuelled an increase in the prices of luxury flats, which to some extent has affected the prices of small and medium-sized flats. This, together with a relatively low supply of flats in the past two years, has led some people to worry that their plans to buy a home may be frustrated. However, there are also suggestions that the Government should act prudently to prevent public policies from causing wild fluctuations in property prices. Hong Kong's residential property market is extremely sensitive. Any such fluctuations in property prices would have a profound impact on the economy, on hundreds of thousands of flat owners and on the public.

23.      The Government is closely monitoring the situation in the property market. In January this year, the prices of some luxury flats returned to the peaks of the 1997 property boom, while prices of small and medium-sized flats were about 23 per cent lower. Overall, property prices are eight per cent above their peaks before the financial tsunami. On average, the ratio of mortgage payment to household income in the current low-interest rate environment is reasonably healthy. According to figures from the fourth quarter of last year, the ratio of mortgage payment to median household income is around 38 per cent for a 20-year mortgage on a flat with a saleable area of 45 square metres. This is lower than the average of 53 per cent in the past 20 years.

24.      While the local property market is still reasonably healthy, we must not lose sight of the increasing risk of a property bubble developing with the global economic recovery and the abundant liquidity in the international financial markets. The rise in property prices has picked up again after a slight moderation in the fourth quarter of last year, and turnover also increased. I am particularly concerned that some citizens may no longer afford their mortgage payments if the interest rates were to reverse to a more normal level. To ensure a healthy and stable development of the property market, we will implement measures in the following four aspects.

25.      Our first set of measures will address the fundamental issue of flat supply. Over the past few months, real estate developers have been more active in applying for sale of sites on the Application List, lease modifications and land exchanges. In response to the Government's request, the MTR Corporation Limited (MTR Corporation) and the Urban Renewal Authority (URA) have also quickened the pace of bringing residential sites to the market to increase the supply of flats in the coming few years. In 2010, the number of private residential units completed will increase to 14 300. In the coming three to four years, we estimate that about 53 000 private residential units will come onto the market. To further increase the supply of flats, we will introduce the following measures.

26.      While we believe that the Government should maintain the market-driven Application List system as its principal mechanism for the sale of government land, improvement measures should be implemented to increase residential land supply. In this connection, the Government has drawn up the Application List for 2010-11 for application by the market. However, depending on market conditions, the Government will put up several urban residential sites in the List for sale by auction or tender in the coming two years if they have not been triggered.

27.      In addition, we will liaise with the MTR Corporation and the URA to increase the supply of small and medium-sized residential flats in their West Rail property development projects and urban renewal projects respectively. We are also preparing to sell by open tender a site of about 1.2 hectares near the West Rail Long Ping Station in Yuen Long for private residential purpose, and will increase the supply of small and medium-sized flats by specifying in the land sale conditions requirements in terms of the minimum number of flats and the range of size of such units. The Secretary for Development will elaborate on these improvement measures when announcing the Application List for 2010-11.

28.      At present, there are more than 300 000 Home Ownership Scheme (HOS) flats. Over 60 000 are flats with premium paid and 250 000 or so are flats with premium not yet paid, and the two categories of flats can be put on sale in the open market and the HOS secondary market respectively. Mostly priced below $2 million and situated in various districts of the territory, HOS flats can cater for the medium and low-priced property market. The Hong Kong Housing Authority will actively explore means to revitalise the HOS secondary market.

29.      Second, we will increase the transaction cost of property speculation with appropriate tax measures so as to reduce the risk of creating a property bubble. I propose that with effect from 1 April this year the rate of stamp duty on transactions of properties valued more than $20 million be increased from 3.75 per cent to 4.25 per cent, and buyers will no longer be allowed to defer payment of stamp duty on such transactions. In parallel, we will closely monitor the trading of properties valued at or below $20 million. If there is excessive speculation in the trading of these properties, we will consider extending the measures to these transactions.

30.      The Inland Revenue Department (IRD) has established procedures to track property transactions involving speculation and will follow up each case closely. If it is found that such transactions constitute a business, the IRD will levy profits tax on the persons or companies concerned for profits arising from such transactions.

31.      Third, we will ensure transparency in property transactions and transaction prices to facilitate effective operation of the market. The Chief Executive announced in November 2009 three measures including shortening the lead time for developers to make public details of transactions, and requiring developers to list the price per square foot in saleable area of individual flats and adopt a reasonable floor numbering system. We will work to uphold fairness in market operation to ensure that both buyers and sellers can conduct informed transactions. We will not tolerate market players disseminating confusing information in an attempt to manipulate the market. I have asked the Secretary for Transport and Housing to enhance the regulation of property transactions to ensure that citizens can buy and sell properties in a fair and transparent market. The Bureau is now exploring further measures to strengthen the regulation of the sale of first-hand, uncompleted private residential flats.

32.      Fourth, we will strive to prevent excessive expansion in mortgage lending so as to avert fuelling an asset-price bubble in the property market. Last October the HKMA issued guidelines to banks, lowering the loan-to-value ratio for mortgages on properties valued at $20 million or above and requiring banks to process mortgage loan applications prudently. I have asked the HKMA to closely monitor the situation and take further measures when necessary to strengthen the prudent regulation of banks.

33.      It is the policy objective of the Government to ensure a healthy and stable development of the property market. The above measures strike a balance between reducing the risk of a property bubble and preventing public policies from causing unnecessary fluctuations in the property market. It is very important to maintain this balance particularly at this point in time, in the face of uncertainties in the external environment. The Government and the regulatory bodies will continue to closely monitor the situation and take further measures when necessary.

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