The unintended consequences of real estate transaction tax

Abstract

Two rounds of Tobin-type transaction tax, known as Special Stamp Duties (SSD), were introduced in Hong Kong's property market in 2010 and 2012 to curb speculation. This study examines the unintended consequences of these taxes. There are four major empirical findings. First, both rounds of SSD have raised the proportion of first-hand residential property transactions in the housing market. This is because the SSD creates a lock-in effect which reduces the housing supply in the second-hand market. The consequence is that potential buyers are driven to the already concentrated first-hand market dominated by a few developers. This has strengthened the market the power of the big developers and thus sustained housing prices. Second, since no SSD is chargeable after a minimum holding period, a large amount of transactions occurred right after this minimum holding period. This tax driven bunching suggests that some properties were held for a period longer than the optimal holding period, which implies deadweight loss. Third, housing units subject to SSD appeared to sold at a discount in the second-hand market as a result of the joint liability of both buyer and seller to pay SSD. Given this unclear delineation of responsibility, there is an incentive for the buyer to pay for the SSD so that the observed transaction prices are below market prices. This has introduced noise in the observed transaction prices. Fourth, SSD has reduced housing market efficiency as shown by an increase in the serial correlation of the returns on the housing price after its introduction. In addition, returns on the housing price index exhibit a more sluggish response to that on the listed property companies after introduction of SSD. In sum, not only that property prices continues to escalate after the introduction of SSD, the tax has created undesirable consequences that were not intended by the policy makers.