Homing in on reality
By Sin-ming Shaw
High property prices are the root of all the SAR's economic ills and the Government should stop rigging the market and allow costs to fall.
CRITICS OF CHIEF EXECUTIVE Tung Chee-hwa's housing policy want him to abandon his long-term goal of selling more subsidised housing to the "sandwich class", whose income is historically inadequate to buy a home in the free market. But their real agenda is to get the Government to put a floor under the soft property market, using "negative equity" among many homeowners as supposed "evidence" that the Government must act.
This is a shallow argument, devoid of intellectual integrity. These critics forget there are more people out there who still cannot afford to buy, and that there are business owners who cannot survive or prosper because of high wages they have to pay, much of which their workers use to pay their residential rents or mortgages.
The pervasiveness of real-estate prices in this asset-inflated economy is such that it exaggerates only slightly to categorise the rigged property market as the mother of all Hong Kong's economic ills.
Critics fail to address the central issues of how to provide affordable housing in an economy grossly distorted by property price inflation and how to make Hong Kong competitive again. They say property values have declined by 50 per cent from their peak and are now reasonable. That is nonsense. Peak values in 1997 were absurd: 50 per cent from those levels still makes Hong Kong over-priced and one of the most expensive places in the world.
Favourable comparisons with London and New York's real-estate market are misplaced, as both those cities are metropolises of countries with broad economic and intellectual activities that create genuine wealth. Hong Kong is conspicuously short of intellectual capital. Its education system, strangulated by inept government bureaucrats, can hardly produce students proficient in Chinese, let alone English.
Hong Kong used to be unique. It was the world's window to China and vice versa. Its excellent bilingual labour force was the envy of its Asian neighbours. It justifiably charged a premium price for its location, its labour and its services. But the opening up of China and the decline in Hong Kong's labour quality have greatly reduced the SAR's claim to such a franchise. High property values have further eroded that position.
Neighbouring cities have become viable alternatives to Hong Kong. Even Sydney is the preferred location for Hollywood movie production in Asia, even though Hong Kong has always been a movie town. Costs in Shenzhen, Shanghai, Singapore and Sydney are a fraction of those in Hong Kong. Such a disparity cannot be explained away simply by the allegedly higher productivity of labour in the SAR. The Internet and high-speed data transmission has chipped away at the importance of where one is located. Soon, broadband transmission will become widely available. The importance of location will be replaced by the importance of speed.
Hong Kong is not doing itself a favour by remaining expensive. A responsible government with a long-term view must bring Hong Kong's real estate prices down further, and has the ability to do so, since its own land policy is the main determining factor of such prices.
Critics say the Government should not intervene in the private market. That is, in general, true. But when it comes to Hong Kong's real estate, intervention is not the issue, since the Government is the sole seller of land and its usage rights. Whatever the Government does amounts to "intervention", as its actions affect the market price of property. The Government should exit the business of manufacturing public housing. It should instead sell the land parcels publicly to the private sector to build on them. It should not compete with the private builders for customers.
Above all, it should be totally transparent over how much land it plans to sell. Right now, its decisions are entirely arbitrary. The standard government mantra that "it depends on market conditions" is no rule at all.
The Government should announce a target of selling a minimum amount of land every year - or, more accurately, the building space such land can generate on it - at the rate of the nominal growth in incomes in Hong Kong. The Government should then stick to such an auction programme. Its current policy of making land available on a reserve list - in which potential bidders can express interest - allows large developers to decide when to buy.
The Government should sell space the way any government sells bonds to finance its operations. It must not try to play the market by timing it. It should stop manipulating it to maximise revenue. The cost of doing so will be reflected firstly in a bubble, and later in economic stagnancy. The bubble in the 1990s was a result of the Government limiting the sale of land to 50 hectares per year in the run-up to the handover. This was a Beijing-imposed decision suggested by local property tycoons and agreed to by the departing British who, by then, couldn't care less.
Once the market is convinced of the stability of the government policy, prices will adjust quickly and the Hong Kong property market will become more affordable and less volatile. In the short term, property owners are likely to see their values depreciate further. However, without short-term pain there will not be meaningful economic growth to support the current level of property prices.
Mr Tung should be commended for understanding this problem. He should also be decisive. He cannot keep supporting the property market by withdrawing supply of space. Mr Tung should choose a better alternative to accomplish his goal by selling the land and letting the private sector build affordable housing.
An expensive economy can adjust in one of two ways (or both) to regain competitiveness: allow the exchange rate to depreciate or allow asset prices to fall. Hong Kong, unwilling to change its peg, panicked as asset prices were adjusting and intervened massively in the stock and property markets on the unfounded assumption that the banking system would otherwise collapse. A great opportunity for Hong Kong to stay competitive was lost.
Lower property prices would hurt a certain sector of the economy temporarily, but will benefit all sectors of the society in the long run. This even includes the developers. Abnormally high developer margins may, and should, disappear, but the volatility of the market will also be reduced. The supply side effect encouraging more and newer businesses to start and prosper will be substantial.
Mr Tung can achieve this by sticking to a straightforward land auction schedule, and selling land of varying sizes at a regular interval at whatever price the market dictates. This is similar in spirit to the 85,000 new flats a year target Mr Tung set in his 1997 policy address.
Sin-ming Shaw is a private investor and a visiting scholar at Harvard Univers
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