Unfree Markets & the Hong Kong Property Bubble

♠ Posted by Emmanuel in at 10/31/2012 08:43:00 AM
The late Milton Friedman once lauded Hong Kong as the archetypal success story in laissez-faire economics--especially when compared with its erstwhile colonial master the United Kingdom. With its low taxes, few penalties in opening and closing businesses and so on, it is no surprise that Hong Kong ranks second in the World Bank's Ease of Doing Business league table.

However, there are now clouds over the horizon since Hong Kong may have actually become too attractive a destination for investment--particularly in real-estate. As China slows down and the Weest remains in the doldrums, it's only natural that more parked their money in the place which generally fares well regardless of global economic conditions. It was thus with great surprise on the part of many that the Hong Kong government has effectively put out the "FOREIGNERS NOT WELCOME HERE" (or mainlanders for that matter) sign as far as real estate investment is concerned:
Property developer stocks are under pressure Monday as the market digests surprisingly tough new measures to cool Hong Kong’s property market. By targeting non-resident buyers with a new tax, finally the government is acknowledging the role of offshore demand in its overheated property market. The key measure is the introduction of a transaction tax of 15% on non-permanent residents, as well as all corporates purchasing residential property. 

Such taxes go against Hong Kong’s free-market ethos and are likely to hurt some unintended targets — expatriates for one. But it looks well designed in the sense it should change behavior and immediately choke off some external investment demand for residential property.
There are also international monetary dynamics at work here with Hong Kong trying its best to preserve its longstanding currency board at USD1 = HKD 7.75 that make the place look even (gulp) a bargain of some sort:
Another risk with the latest move is that it again flags to international investors the stresses facing the 29-year-old currency peg as its strains under “hot money” flows. Arguably, it is at the root of local asset inflation by forcing the importation of low interest rates and a weak currency value from the U.S. Over the past 10 days, the Hong Kong Monetary Authority has repeatedly had to intervene to stop the currency from strengthening by selling Hong Kong dollars.
The complaints of Hong Kong resident citizens are similar to those made by those in another bastion of free enterprise, Singapore. That is, by buying up all the good properties, foreigners supposedly make it difficult for them to find residences that do not cost an arm and a leg. While I do understand this sentiment, you have to wonder though if such measures alike those being promulgated by Hong Kong will do more damage to its reputation than actually mitigating the real-estate bubble. Similar measures didn't work in Singapore:
Slapping a punitive tax on non-resident buyers won't change things. If you don't believe that, just look at Singapore, which imposed its own additional stamp duty on foreign and corporate buyers in December last year. Transaction volumes fell initially, but then recovered. Prices have continued to rise. Earlier this month, a bungalow on Sentosa island sold for a record S$3,214 per square foot. That's equivalent to an eye-popping HK$20,398 a square foot.

In the long run, however, the government's new tax will have indeed an effect. By selectively penalising non-residents, it broadcasts the message that Hong Kong is no longer open equally to all comers and so hammers a first nail in the coffin of the city as an international financial centre.
My thoughts exactly. Unlike the American real-estate bubble, though, Hong Kong is actually an economy you can put some faith in--but apparently the HK government now believes that too many have done so.