Friday, August 20, 2010

A bad idea to cool the property market

Following the Hong Kong government's second batch of measures to cool Hong Kong's (allegedly) over heated property market there have been suggestions that Hong Kong should further cool the market by introducing a capital gains tax on non-owner occupied properties which are sold within a relatively short period of time after being purchased. The theory is that it will discourage speculators from pushing up prices.

This ranks as one of the silliest suggestions have I heard for a long time. The most immediate effect is that owners of properties who would be hit by the tax will simply keep their properties off the market until the holding period has expired. In effect, the tax would reduce supply. If I understand basic economics correctly, reduced supply should (all other things being equal) result in higher prices.

History has shown that capital gains taxes tend to push prices higher: as an example, share and property prices in Australia both increased when capital gains tax was first introduced.

Conceptually the idea will also have the effect of further concentrating an already overly narrow tax base - the bulk of the tax would fall on the same middle class which already contributes a disproportionate amount of Hong Kong's tax base.

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