The market distortion effects of mortgage tightening and transaction taxes: Evidence from Hong Kong residential resale market

By using transaction-level data, we study if two popular policies intended to cool an overheated housing market would serve their intended purposes. We found both mortgage tightening and Special Stamp Duties (SSD) actually led to higher starter home prices in Hong Kong. Mortgage tightening shifted the demand for bigger homes to that for smaller ones. The SSD that applies to resales within a specified period of the original purchase lowered turnover across the housing market. The decline in turnover is, as expected, sharpest for small flats, implying a dramatic shrinkage in second-hand supply of such homes, driving their prices up. We also found transactions bunching as many homes are held till the SSD is no longer applicable, indicating lock-in effects. Relative to those that are not subject to the SSD, the prices of properties subject to the levy are found to be lower by 6.8%.