Policy responses to an overheated housing market: Credit tightening versus transaction taxes

Among Asian economies, Hong Kong has experienced the highest real growth in house prices since the 2010s. Two macroprudential measures, namely credit tightening (loan-to-value ratio cap) and transaction taxes (stamp duty), were introduced to cool down the overheated housing market. This study examines and compares their effectiveness based on a set of constant-quality house price indices. Through an error correction model, we find that credit tightening was able to curb house price growth in the high-price segment, while transaction taxes could not. An explanation is that the exemptions from transaction taxes for those with genuine housing needs could be abused by other market participants. It is easier for buyers to exploit the exemptions to get around the stamp duty than to manipulate the property valuation for mortgage lending. The implication is that the effectiveness of macroprudential measures hinges on whether compliance or exemption can be easily monitored and enforced.