Stamp Duty Policy, Housing Speculation, and Property Market Dynamics

Imposing a property tax is a common measure that governments take to regulate speculative real estate activities; however, its effectiveness in cooling market prices is not clear. Starting in 2010, the Hong Kong government introduced a series of Special Stamp Duty (SSD) policies to curb property flippers. We find that although the SSD effectively curtailed flipping transactions from 21.1% in 2010 to 1.3% in 2013, it failed to cool the market price. Primary and secondary property prices increased by 5.7% and 1%, respectively, 1 year after the introduction of SSD. As SSD effectively increased selling costs and prolonged potential sellers’ holding period, supply from the secondary market dried up and homebuyers were crowded into the primary market. Moreover, the influx of homebuyers from mainland China further crowded out local homebuyers, especially in the primary market, in which mainland buyers’ presence increased from 5.6% in 2009 to 19.7% in 2011. Prior to the SSD, local homebuyers enjoyed a 3% discount over mainland buyers in the primary market. However, this price advantage was diminished due to more intensive competition after the SSD. We also investigate flippers’ responses to SSD policies with respect to their holding period. We find that flippers deferred sales until the stamp duty lock-in period ended, then urgently sold the properties at a discount. Further, those who sold within the lock-in period strategically reduced their selling price. Overall, our paper sheds light on the implications of stamp duty policy on speculative activities and real estate market dynamics.