Vacancy tax, a double-edged sword to housing market

HONG KONG, 25 June 2018 – Housing prices are unlikely to reverse course in the short-term, assuming the government introduces a vacancy tax similar to the level of government rates. But developers are expected to turn less aggressive in land bidding, according to JLL's monthly Residential Sales Report released today.

There is growing anticipation for the government to announce a vacancy tax on residential units by the end of June. Market sources claim that the levy will likely to be focused on new-builds in the market, and charged using existing taxation channels.

As of the end of 2017, about 21% of the 42,942 vacancy residential units were new builds, a jump from just 8% five years ago. Developers may have held back on selling inventory on hand with a goal to fetch a higher price at the right timing. The figure, however, still remains below the 30% recorded back in 2006, when the number of vacant new builds reached 19,000 units. The highest level of residential vacancy ever recorded in the city since 1990, in terms of number of flats, was 74,200 units, in 2002.

Henry Mok, Regional Director of Capital Market at JLL, said: "Conceptually, a vacancy tax will pressure developers to offload inventory within a shorter period of time. They may need to reconsider the launch strategy of their new projects to maximise revenue whilst minimizing vacancy costs. In the long-run, we may see an adjustment on land prices, as developers look to safeguard their bottom line in anticipation of higher holding costs. Still, the extent of the impact would depend on magnitude of the tax,"

Ingrid Cheh, Associate Director of research department at JLL, said: "Assuming an approach akin to government rates being charged on leased properties, a 5% vacancy tax on the rateable value of a property may not be sufficiently punitive. The tax would translate to a 0.1% haircut to current market yields (standing at roughly 2.3%). In spite of that, developers are unlikely to forgo capital appreciation potential of residential properties, which have exhibited a CAGR of 7.2% since 1990. Meanwhile, developers may consider funnelling the additional costs to buyers to offset the vacancy tax, leveraging on the strong levels of demand in the market,"

"Also, we anticipate some issues to arise revolving around the fairness of implementing the vacancy tax. Developers with stronger financial backing may be less affected by higher holding costs. The ability of developers to offload inventory could also depend on the intrinsic characteristics of the project as well as external timing factors such as the issuance of pre-sale consent," Mok added.