Tuesday 23 November 2010

News & Economics: 15 minus 15 Isn't Zero --The Tug-of-war between Demand and Supply

Took a short break on Monday and got myself a whole lot more work to do instead, which got me to sleep at 3:30am last night, so today, I'm mind-detached-from-body right now. Allow me to talk about something simple.

News from the Standard today:

Developers lash stamp duty hikes

Tuesday, November 23, 2010

The Real Estate Developers' Association lashed out yesterday at the government's stamp duty hike and other measures taken to temper runaway property prices, saying they will harm end-users more than speculators.

"Speculators would undoubtedly be hard hit directly," said REDA vice- chairman Stewart Leung Chi-Kin.

"But some end-users, who try to cut losses due to market changes, will suffer at least a 15 percent loss."

Raising the downpayment will also hurt potential homebuyers, added Leung, who is also executive director of New World Development (0017).

"This goes totally against what the government has been saying" to help the common man, he said.

Economic Synergy legislator Sophie Leung Lau Yau-fun said raising the downpayments might make it harder for young people to buy their first homes. But Secretary for Transport and Housing Eva Cheng Yu-wah insisted that potential homebuyers would benefit if speculation is curbed.

Lawmaker Paul Chan Mo-po pointed out a possible loophole in the rules, as buyers and sellers could avoid paying the high stamp duty simply by putting the property in question under the name of a company registered overseas.

A sale would then involve selling the company - not the property - so there would be no stamp duty, he said.
Commissioner of Inland Revenue Chu Yam-yuen conceded speculators could take advantage of the situation as it's difficult to track share-holdings of offshore firms.

Meanwhile, several international fund houses said they expect home prices to slide by 5 to 10 percent in the coming months, and sales volume to tumble.

"Property transactions will fall by 20-30 percent," UBS researcher Eric Wong Chun-ya wrote in a report, released yesterday.

Credit Suisse analysts Cusson Leung and Joyce Kwock forecast home prices to drop 5 percent by the year-end, with transactions plunging 40 percent due to what they called "harsh" measures.

Lucia Kwong at JPMorgan described the step as "strong dose to calm down the housing market."
Agents reported many buyers are pulling out of deals at the last moment.

"Those who signed preliminary contracts between November 6 and 19 are leaving," said Patrick Chow Moon- kit, research head at Ricacorp Properties.

He added some sellers are now cutting prices by 10 percent.


speculator --  (n)[Ca person who buys goods, property, money, etc. in the hope of selling them at a profit
downpayment / down payment-- (n)[Can amount of money that you pay at the time that you buy something, but which is only a part of the total cost of that thing. You usually pay the rest of the cost over a period of time
curb -- (n) [C] a limit on something that is not wanted
loophole -- (n)  [Ca small mistake in an agreement or law which gives someone the chance to avoid having to do something
offshore -- (adj) (of companies and banks) based in a different country with different tax rules that cost them less money
tumble -- (vb)  [Ito fall quickly and without control or to fall a lot in value in a short time
harsh -- (adj) unpleasant, unkind, cruel or unnecessarily severe
pulling out of deals from "pull sb/sth out"-- (phrasal verbto stop being involved in an activity or agreement
preliminary  -- (adj) [before nouncoming before a more important action or event, especially introducing or preparing for it
wuss -- (n) [C] slang coward (= person who is not brave)


Image from blogcdn.com

For those who do not own an apartment, like me, this seems like a really good news, and there is nothing better than to see the property price drop lower. The question is, when will the drop begins and when will it end? When will then be a good time to buy in?

5 to 10% drop in the coming months sounds like a pretty safe and reasonable guess by the international fund houses, but will it stop there and rebound? A number of famous people have said that price will jump 20-40% in the coming year too, but that was before the government took action, which proves that experts can be wrong, very wrong too!

I think, since the new rule of the game is that a stamp duty of 15% of the transaction cost will be charged upon the buyer, then logically thinking, a near 15% drop in property price is needed to regain the transaction activity before the announcement of new rule. However, there are some bad assumptions in this thinking......because "15 minus 15 Isn't Zero", because the Tug-of-war between Demand and Supply isn't linear.

The first assumption made by most bullish analysts was that HK government does not dare to do anything to harm the housing market after the 1997 "85,000 incidence" was already a really really bad assumption. It is like saying that a kid burnt in the fingers by lighter flame dare not use his stove. The fact is, any government has the power to ruin the property market if she wants to, the question is, do they need to go so far? I personally think that the John Tsang has done a great job here, showing speculators that the HK government isn't a wuss.

The second assumption is that, if the transaction activity really does return to the earlier level, when people were buying and selling quickly for short term gain, will the government just wait and see once more? Or will she say, "okay, let's make it 20% stamp duty if you sell within 6 months!" You see, once the rules are set, only a small amendment is needed to continue.

So, "to buy or not to buy?" "To wait or not to wait?" "To put your money in your pocket or someone else's?"

Fruit for thoughts!

Image from neurosoftware.ro