Hot Speculative Money & Asia

by on March 4, 2013

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IF

Governments in China, Hong Kong and Singapore are acting to curb property speculation. Zero Hedge comments:

The reason for this “hot money” phenomenon is the easy money policy adopted by all the world’s central banks (except for the PBOC of course, which is forced to stick with reverse repo-based ultra short-term money injections), coupled with the anti-foreign capital stance adopted by Switzerland, making China, Hong Kong and Singapore as the go to targets for “excess global cash.”

HK and Singapore have taken the wrong turn by lifting their property sales taxes. It is a populist move to increase the tax rate on luxury apartments:

The Hong Kong government last week doubled sales taxes on property costing more than HK$2 million ($258,000) and targeted commercial real estate for the first time as bubble risks spread in the world’s most expensive place to buy an apartment.

This fails on two fronts. Wealthier people live in better locations. The locational value will be higher than those living in slums, so they will already be paying a higher nominal amount (land value x property tax percentage). The real issue is the holding time for real estate. Doubling the sales tax will only deter turnover (in order to cover the new higher sales tax). This will increase the holding time and thus amplify price movement.

A yearly Land Tax is the preferred option. It is a holding tax – the longer a property is not earning rental income, the more pressure there is to sell it. A sales tax still allows property to be withheld from the market in order to manufacture scarcity and amplify easy profits.

China has dubbed today’s generation of home buyers as housing slaves. They should be re-named land slaves. Imagine this:

(Sheng) will repay about 4,000 yuan a month for the home, a one-hour subway ride from central Shanghai’s historic Bund that cost 16 times her annual salary, based on the apartment price and her income.

China has been a little more innovative with their property bubble. Whilst ignoring LVT, they have tightened credit requirements:

The central government has since April 2010 moved to stamp out speculation in the property market by raising the down- payment requirement on first mortgages to 30 percent from 20 percent, ordering a minimum 60 percent deposit for second-home purchases and an increase in rates for second loans. It also imposed a property tax for the first time in Shanghai and Chongqing, and enacted restrictions in about 40 cities, such as capping the number of homes that can be bought.

One imagines with the creative use of shelf companies and international borrowings, these hurdles can easily be overcome.

Like gravity is to physics, applying cheap money to a fixed land mass is destined to increase land prices. We ask, who are rising property prices good for?

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http://prosper.org.au/2013/03/04/hot-speculative-money-asia/