Vacancy tax may not be a sustainable fix

Updated: 2019-03-19 07:27

By Ho Lok-sang(HK Edition)

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Ho Lok-sang discusses some of the adverse effectsresulting from the implementation of this new tax - including a loss of revenue for the government

The government is widely believed to be about to levy a heavy-handed vacancy tax on unsold completed properties held by developers. It is believed that the vacancy tax will be levied on properties that remain unsold a year after the Occupation Permit has been issued. Developers are also not allowed to "sell" these units to related companies and avoid the tax. The proposed vacancy tax is rumored to be 200 percent of the ratable value of the property, where the ratable value is defined as the estimated annual rental value of a property assuming that tenant undertakes to pay rates and taxes, while the landlord undertakes to pay the government rent, the costs of repairs and insurance and any other expenses necessary to maintain the tenement in a state to command that rent.

The purpose of the proposed tax is to put pressure on developers so they will sell their finished products as soon as possible. Proponents of the tax point to an estimated 9,000 vacant units in the hands of developers to justify the tax. Stewart Leung Chi-kin of the Real Estate Developers Association said this was a gross over-estimate, saying many were properties designated for rental, and that the issuance of the Occupation Permit does not mean that the properties were ready for occupancy.

Vacancy tax may not be a sustainable fix

Proponents of the tax fear that if whether a property is subject to the vacancy tax is based on days of vacancy after the issuance of the Certificate of Compliance, developers can take it easy to complete all the works as per the obligations specified under the general and special conditions of the land grant/sale documents. That would effectively take away the "teeth" of the tax.

Still, one can argue whether imposing the requirement that completed units must be sold within one year of the issuance of the Occupation Permit is reasonable, since the promised works need extra time to be completed.

But there is a more serious problem with the proposed tax.

In particular, the tax is very heavy. And the chances of not being able to sell within a year of the issuance of the Occupation Permit are quite high, especially for high-end properties which are very expensive as such properties buyers usually are quite particular about what they buy. Developers must, therefore, take the cost of the vacancy tax into account when they bid for land in land auctions. There is little doubt that the tax will translate into a loss of revenue for the government.

Moreover, it is also almost certain that with lower bids on land auctions, the signal to the market will be negative. This will lead to more hesitation by buyers. The government may congratulate itself for the success of cooling the market, but the longer-term result will be lower supply of housing units, as transactions slow down, and developers hold their breath and try to adjust the pace of their construction activities according to the pace of sales.

For all these reasons, it is certain that the tax will affect the profits of developers, and this will backfire hitting the revenues of the SAR government.

But the biggest problem with the tax is that even if it succeeds in increasing housing supply in the short term, it is only a one-off effect. The vacancy tax cannot have a sustainable effect on housing supply, which must be based on a bigger flow of housing completion. The vacancy tax not only cannot increase that, but also may reduce it.

While the Special Stamp Duty and the other kinds of extra stamp duties had raised government revenue, the vacancy tax will not bring in extra revenue, but will reduce revenue in several ways: lower revenue from land sales, lower stamp duties, lower profit tax. I suspect that at this time, with the need to upgrade our hospitals, expand our support for the sick and especially those suffering from rare diseases, construct more public housing, build more old age homes, and improve our social services in general, the government cannot afford to see revenues decline.

To reduce the possible adverse effects of the tax, the government can extend the one year period to one and a half years to two years from the date of the issuance of the Occupation Permit before the vacancy tax is applicable. Stewart Leung had proposed that homes bigger than 1,000 square feet could be exempted from the vacancy tax, saying that such homes belong to a different market and that they take longer to sell. This suggestion is reasonable and deserves to be seriously considered by the government.

Actually, keeping units vacant is costly to developers. Vacant units do not bring in revenue. Although prices may appreciate, they may also fall. Moreover, even if prices do appreciate, the appreciation needs to be big enough to offset interest costs before hoarding becomes profitable. Since property development requires substantial investment, the interest cost is huge. The presumption that developers always want to hoard properties just to elicit a bigger profit is only a presumption. The vacancy tax, understandably, is particularly annoying to developers who are presumed under this tax to be enemies of the people.

(HK Edition 03/19/2019 page7)