Once again, the Hong Kong government has swung from manic to depressive over its property market. A few years ago, in an attempt to gain popularity with the poor, the government reacted to high property prices by promising more government housing programs and more government-built housing projects to make homes more affordable. Since then, apartment prices have fallen in half.
Now, under pressure from angry landowners and property developers, the government is announcing proposals intended to support falling residential property prices. The government will take supply off the market by suspending the sale of some 2,600 apartments (valued at nearly $650 million,) by suspending further sales of government housing this year, and by converting into rentals 56,000 government-built apartment units previously scheduled for sale over the next four years.
The Hong Kong government claims that it allows the market to set property prices in the territory, but in fact it is thoroughly involved. It owns all the undeveloped land there, and regularly auctions limited amounts to the highest bidders, receiving billions in revenues. Government subsidized housing dominates the low-end of the market, with its unrealistically low rents creating shortages and multi-year waiting lists; private developers, facing limited land and high auction fees, necessarily focus on the higher end of the market.
Consider the importance of property in Hong Kong. Residential and commercial real estate represents about 25% of the territory’s GDP. Several years ago, an estimated 80% of companies in Hong Kong’s Hang Seng Index made money directly or indirectly in the property market. Property is important because there never seems to be enough of it for the city’s 6 million residents. A 500 square foot apartment is considered “spacious,” and would typically sell for over $200,000!
As high as that may sound, the problem is that it’s only about half of what the same apartment would’ve cost in 1997, and it is this decline in property prices that has placed such stress on the government – on its friendships, and on its power base in the property developer/investor community.
Property developers are hurting, as evidenced by the recent 50% decline in the HK Property stock index from its 1997 peak. Property owners are hurting too, with tens of thousands now facing negative equity in their properties. Indeed, they are being squeezed so tightly that Hong Kong’s “pro-business” liberal party recently led a march upon government headquarters to demand that the government turn around the weak property market.
Overall, the situation is a mess. Those who cannot afford homes feel the government is colluding with billionaire property developers to withhold land from development, lining their pockets at homebuyers’ expense. Property developers fear that the government is controlling a rising share of the property market, while investors believe the government is driving down the value of their homes. Given its recent history of unprincipled, knee-jerk reactions to the violent swings in prices its own policies have created, the government clearly needs to re-evaluate and reform the entire legal and economic framework for property.
I propose the following principles for guidance:
1) homebuilding is a private, not a government, activity;
2) free markets create and allocate housing best;
3) undeveloped land should not be viewed as a government resource and should be transferred to private, productive use quickly, fairly, and economically;
4) for markets to work, property policies must be transparent and stable over decades, not subject to changing political whims.
If such principles were followed, I believe everyone in Hong Kong would be better served – from the poor aspiring homeowner to the wealthiest property tycoon. And let’s face it, the government itself would ultimately benefit too, by having a lot fewer headaches to deal with.
