Industrial Research: The effect of the overall "cooling" of the Hong Kong property market has yet to be activated.

On February 28, 2024, the Financial Secretary of the Hong Kong Special Administrative Region government, Paul Chan Mo-po, announced the "2024-25 Budget" (hereinafter referred to as the "2024 Budget"). The theme of this budget is "Building Confidence, Seizing Opportunities, and Promoting High Quality Development", with a focus on further consolidating economic growth momentum and implementing medium to long-term high-quality development initiatives. The "2024 Budget" proposes the complete abolition of additional taxes on the residential property market, responding to market expectations for the removal of cooling measures, while also introducing measures to enhance stock market liquidity and attractiveness, support local green and digital transformation, and reduce short-term consumption incentives and subsidies. As the local economy continues to recover steadily, the fiscal policy for the 2024/25 financial year shifts from "moderately loose" in the 2023 financial year to a "fiscal consolidation strategy," consistent with our previous expectations. We will analyze and summarize the main contents and policy highlights of this budget. 1. Economic Outlook and Policy Direction In 2023, Hong Kong's GDP grew by 3.2%, lower than the Hong Kong SAR government's initial forecast range of 3.5%-5.5%. Economic recovery and growth were driven by residents' consumption and tourism, while geopolitical uncertainties and a high interest rate environment affected capital flows and consumer spending patterns, impacting local economic confidence. The "2024 Budget" points out that Hong Kong's economic recovery momentum needs to be strengthened, uneven recovery processes in different industries need to be monitored, and various constraints need to be gradually addressed. Looking ahead to 2024, the Hong Kong SAR government expects the external environment to remain complex, global growth expectations to slow down, and financial conditions to gradually ease, benefiting export performance. With the continued recovery of Hong Kong's capacity to receive tourists, especially in air passenger traffic, and the government's strong support for the "event economy", service exports, private consumption, and fixed asset investment are expected to continue to grow. The GDP is expected to grow by 2.5-3.5% for the year. In terms of inflation, the government expects local cost pressures to increase with economic recovery, while external price pressures are expected to ease. However, continued geopolitical tensions could bring risks of inflation, with the local basic inflation rate and overall inflation rate expected to be 1.7% and 2.4% respectively for the year. In the medium term, the government expects peripheral market interest rates to gradually decline in the coming years, with global demand gradually recovering, coupled with national efforts to promote high-quality development bringing broad development opportunities for Hong Kong. The government expects an average annual real GDP growth of 3.2% and an average annual basic inflation rate of 2.5% for the years 2025-2028. 2. Highlights of Measures 2.1 Stabilizing the property and stock markets to create favorable conditions for recovery Under the influence of a high interest rate environment, geopolitical conditions, and disrupted economic recovery expectations, Hong Kong's property and stock markets remained weak in 2023. The local private residential property price index fell by 7% for the year, and the non-residential property market was quiet, with the Hang Seng Index falling by 13.8% for the year, resulting in negative wealth effects and affecting confidence in the development of Hong Kong as an international financial center. In October 2023, the Hong Kong SAR government's "2023 Policy Address" addressed key concerns about improving stock market liquidity and optimizing property tax rates. The "2024 Budget" continues to strengthen and implement related measures. 2.1.1 Effects of "cooling measures" in the property market still require a rate cut to activate On the demand side, the "2024 Budget" announced the removal of all residential property demand management measures, meaning that all residential property transactions no longer require the payment of additional stamp duties (SSD), buyer's stamp duties (BSD), and new residential stamp duties (NRSD). These measures mark the reopening of Hong Kong's residential property market to local and foreign residents after more than 13 years, implementing a unified property tax rate for both local and overseas residents. Previously, the "2023 Policy Address" announced adjustments or relaxations to related tax rates, and implemented a "pre-exemption and post-collection" arrangement for stamp duties for qualified overseas talents purchasing residential properties. Financial Secretary Paul Chan Mo-po pointed out that over 500 applications have been approved under the "pre-exemption and post-collection" arrangement. These measures are expected to boost the purchase of self-occupied homes by local and overseas individuals and attract property investors back to the Hong Kong market. In addition, the Hong Kong Monetary Authority has simultaneously relaxed the countercyclical macroprudential measures on property mortgage loans, including relaxing the loan-to-value limits for owner-occupied residential properties and non-residential properties, and temporarily suspending the stress test requirement of a 2% rise in the assumed mortgage lending rate, which is expected to support the willingness of potential buyers to enter the market. After this round of adjustments, the related mortgage support policies cover 98% of general property market transactions in Hong Kong, with most of the countercyclical measures almost returning to the levels of 2009-2010. The Hong Kong Monetary Authority emphasized that even with revised measures, the Hong Kong banking system still has ample buffers to cope with significant property price adjustments. On the supply side, in a high interest rate environment, property developers' investment willingness was low, with several residential land auctions by the government in the 2023/24 financial year going unsold, resulting in land revenue of HK$19.4 billion, significantly lower than the expected HK$85 billion. The government's land sale plan for the 2024/25 financial year includes 8 residential land lots, a reduction of 4 lots compared to before. In terms of private housing supply, the government estimates that over 19,000 private residential units will be completed annually from 2024 onwards, an increase of about 15% over the average of the past 5 years; the potential supply of first-hand private residential units in the next 3 to 4 years is estimated to be about 10,900 units. In addition, the Hong Kong Monetary Authority has relaxed the project financing ratio for property developers to the level before the tightening of related policies in 2017, which is expected to support the recovery of property development and investment activities. Further warming of the property market still awaits more signals of reaching the bottom, with a possible reversal of the trend of simultaneous declines in volume and prices in the second half of the year. Since the introduction of property tax concessions in October 2023, the Hong Kong residential property market has seen an increase in transaction volume for three consecutive months, but the downward trend in residential property prices has not yet reversed, further falling by 1% in January 2024.The cumulative adjustment decreased by 0.6% compared to the high level in 2021, exceeding 20%. It is expected that the local high interest rate environment will be maintained before the Federal Reserve officially starts the rate-cutting cycle, with first-hand properties and second-hand market sellers continuing to sell at low prices, leading to possible fluctuations in property prices in the first half of the year and a slowdown in the decline in the second half of 2023. In the medium to long term, the Hong Kong SAR government's talent and business introduction plan is expected to further increase housing demand, providing support for property prices.Kong50 2024Hong Kong or expanding business in Hong Kong, is expected to bring in over HKD 40 billion in investment and create approximately 13,000 jobs. At the same time, Hong Kong Investment Company will implement the first batch of direct and joint investment projects in the first half of this year, covering areas such as life sciences, green technology, semiconductors, and chips.It is worth noting that the Hong Kong Special Administrative Region Government has taken the lead in establishing a simple fund migration mechanism for open-ended fund companies and limited partnership funds to attract existing foreign funds to register and operate in Hong Kong. In the first half of this year, the SAR government will submit legislative proposals to introduce a company migration mechanism to facilitate companies registered overseas, especially those with the Asia-Pacific region as their business core, to transfer their place of registration to Hong Kong. In terms of talent aggregation, the "Fiscal Budget for the Year 2024" pointed out that in the past year or so, various talent immigration programs, including the "Quality Migrant Admission Scheme," launched by the SAR government have approved more than 140,000 applications, with approximately 100,000 talents already arriving in Hong Kong. Among individuals approved under the "Quality Migrant Admission Scheme," the median age is 35, 60% are married individuals who generally bring their families to Hong Kong; more than 50% of talents who have been in Hong Kong for six months or more have been employed, with a median monthly income of about HK$50,000. The budget proposal this time suggests that the Labour and Welfare Bureau will further review the arrangements related to the "Quality Migrant Admission Scheme" in the mid-year of this year to ensure that the measures are competitive and effectively address manpower needs; meanwhile, the Hong Kong Talent Services Office (Talent Office) will hold talent summits to further promote talent mobility and cooperation within the Greater Bay Area. 2.4 Embrace green and digital transformation to drive transformational development The "Fiscal Budget for the Year 2024" pointed out that promoting high-quality development is conducive to stimulating sustained economic innovation and growth, with "green future and digitization" as two main themes. This fiscal budget has increased financial support for GREEN ECONOMY and digital development. Also, based on the positioning of the "Eight Great Centers" set by the National "14th Five-Year Plan" for Hong Kong, this budget proposal also put forward optimization suggestions for financial support in the directions of international innovation and technology centers and international trade centers. 3. Fiscal Consolidation Plan The "Fiscal Budget for the Year 2024" released that the estimated comprehensive deficit for the 2023/2024 fiscal year is HK$101.6 billion, exceeding a billion Hong Kong dollars for two consecutive years and significantly higher than the expected HK$54.4 billion in the previous budget proposal, mainly due to the impact of rising overseas interest rates, economic slowdown, and ongoing geopolitical tensions. Financial Secretary Paul Chan Mo-po pointed out that the pace of Hong Kong's economic growth in 2023 was slower than expected, although overall government spending has fallen after the epidemic, softening asset markets have led to a decline in land prices and stamp duty revenue, with the decrease in government land auction income having a greater impact on finances than the reduction in stamp duty revenue from property purchases. For the fiscal year 2024/25, the SAR government expects the external environment to remain complex, and it will take time for income related to the asset market to fully recover. A fiscal deficit of HK$48 billion is expected to be recorded in the 2024/25 fiscal year. Paul Chan Mo-po stated that under this background, the SAR government is implementing a comprehensive fiscal consolidation plan, focusing on "cutting costs," with major measures including controlling the growth of operational expenses and adjusting expenditure arrangements by reviewing the urgency and priority of government basic projects. At the same time, the plan involves increasing some revenue to strive for the government to restore fiscal balance within several years. It is worth noting that the SAR government plans to increase revenue by introducing a two-tier system for standardizing salary taxes and personal income taxes, estimating additional revenue of HK$910 million and HK$840 million annually. Additionally, the SAR government proposes to reintroduce a 3% hotel accommodation tax, scheduled to be implemented from 2025 onwards. This tax, which was introduced in 1966 and canceled in 2008, is expected to account for less than 1% of overnight visitor consumption in Hong Kong and aims to attract more overnight and high-spending tourists from different source markets to travel to Hong Kong. The impact of these measures on the wealth effect of high-income groups and the consumption of high net worth individuals in Hong Kong remains to be observed.