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Red Hot and Frozen Solid What does Hong Kong’s government want of the property market? Judging from the measures that have been introduced, the government seems to be rather confused as to its aims. Two years ago – is it really that long? -- the administration declared itself against the rich buyers and expensive residential property. That was when it introduced extra stamp duty on sales of residential property at more than HK$20 million where the property had been bought in the last couple of years. Mainlanders and overseas purchasers were distorting that end of the market, it had become too expensive. The solution was to make it more expensive. Of course this did not work. The stamp duty was a marginal cost for those who saw Hong Kong property as a one-way bet. Limited supply and ridiculously low interest rates, the result of the link to the US dollar, meant they were right. Those who had recently bought were anyway quite content to wait for a couple of years to resell: Prof Bernanke had already told them that rates would not be going up until 2015, if then. The monetary authorities imposed a requirement of a down-payment of 30 per cent of the price. This told us that the authorities feared a collapse of that order, maybe as a result of the measures. The requirement gave the banks the protection that the authorities feared the banks needed but it also had the effect of ruling out of the market those first-time buyers who had no support from their parents. Not surprisingly, demand for modestly-priced, second-hand flats dropped. Their asking prices, however, did not. With nowhere better to invest their money than in property (low interest rates again, plus an uninspiring stock market), owners of flats simply held onto them. Red hot prices with frozen activity: quite an achievement. Hong Kong land for some of the Hong Kong people Lessons determinedly unlearnt, this Autumn the old Financial Secretary in the new administration has tried more of the same. Something had to be done, you see, because the public was convinced that it was all caused by those Mandarin speakers that have invaded the SAR with their bags full of cash. Follow Singapore and hit them with yet more stamp duty was the answer. Extend the period for special duty to three years from purchase. Make buyers pay even more. The new measures ignore that, thanks to the appreciation of the renminbi and that US-HK dollar link, to mainlanders Hong Kong property is still a bargain: 20 per cent off what it used to be and appreciating all the time. Those who do buy are content to wait even longer than three years to resell because they know that interest rates and the exchange rate are unlikely to move against them. The measures have killed off local buyers. This is ironic, given the slogan used when the Chief Executive was striving for selection. Hong Kong land for Hong Kong people was the cry. I suppose this was an improvement on Hong Kong land for Hong Kong Land which might have been the mantra of twentieth century governors of Hong Kong. But if you implement it by measures which tell overseas investors to get lost, it is contrary to all that has made the place a commercial success. The something-must-be-done tendency Outside the government, defenders of the latest measures are pretty thin on the ground. However one eloquent letter in the local press presented the argument that a bubble was forming and had to be pricked before it inflated to such an extent that its bursting would cause calamitous consequences as has recently happened in the West and as occurred in Hong Kong after 1997. Property crashes affect everyone, the author asserted, and property price rises are the main driver of inflationary pressures, so something had to be done. Hong Kong is not a free market, the letter continued, since the government controls land supply and turns a blind eye to market manipulation, so free-market ideals have already been forsaken. Purchasing restrictions on foreigners are not uncommon, he goes on: they have them in China, Thailand and Indonesia as well as Singapore. The extra duty helps pay for Hong Kong’s top-class infrastructure, safety and medical care which foreigners living here can enjoy, he says. Other measures, such as freeing-up land supply and taxing vacant property, would be going too far for the present government, so extra stamp duty will do for now. The writer seems to be correct that other, more effective measures are beyond the government. The one step which would be bound to succeed, re-valuing our currency, is certainly not on the agenda. But that does not justify taking steps which are peripheral or ineffective yet damaging to the city’s reputation. Nor does the fact that they discourage foreign buyers elsewhere in the region make that approach right for an economy which has prospered from and has traditionally welcomed overseas investment and foreign residents. The argument that foreigners should pay more so as to contribute to the costs of maintaining the city’s services is an unconvincing attempt to justify discrimination by place of origin. Everyone resident in Hong Kong, irrespective of nationality, pays taxes. So does every owner of property. The Hong Kong government has plenty of money for services: it runs healthy surpluses and uses a vast pool of reserves to keep our currency low against the US dollar, thus exacerbating the property price problem. The often-heard assertion that the government controls land supply is not really true. Topography is the real constraint on new building land; a host of other factors inhibit the re-development of older land. The recent legislation regulating the sale of uncompleted flats negates the claim that the authorities tolerate market manipulation. And who knows whether we are in a bubble? Land prices are certainly high in Hong Kong dollars and compared to ten years ago, but that looks more like the upswing of the price cycle, the long climb from the depths of the SARS era. Peter Churchouse, the property economist, says that even today’s prices are affordable, given the increase in disposable household income during those ten years. Viewed from outside by those whose money is not tied to the US dollar, the prices are anyway not so high. Something-must-be-done is a dangerous basis for making policy: it usually leads to bans and taxes. The best way to help the local population is to do something positive such as a large expansion of the Home Ownership Scheme, a copy of one of Singapore’s better ideas. It has been a great success in helping local residents onto the housing ladder and in promoting private ownership.
Malcolm Merry is Associate Professor of Law at the University of Hong Kong and a Hong Kong barrister. He is the author of Hong Kong Tenancy Law (5th ed, LexisNexis 2010) and co-author (with Paul Kent) ofBuilding Management in Hong Kong (2nd ed, LexisNexis 2008).
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