Real problem with the housing shortage is that there isn't one

PUBLISHED : Tuesday, 29 May, 2012, 12:00am
UPDATED : Tuesday, 29 May, 2012, 12:00am


With home prices soaring, the government will put eight sites up for sale over the summer in what [development minister] Carrie Lam calls a 'conscious effort' to increase land supply

SCMP, May 26

It's standard government reasoning. If prices are up too sharply there must be a shortage of supply relative to demand. Therefore increase the supply to meet demand and prices will become stable.

Let's apply this thinking to another essential of life where prices are rising even faster than in property at the moment.

The official figures say the average home price rose by 6.3 per cent in March over March the previous year. For food eaten at home that same figure was 9.3 per cent in March. Quite clearly, then, we suffer from a food shortage even more acute than our housing shortage.

By standard reasoning it is perfectly apparent from the food inflation figures that demand for food is much greater than the supply of it. We should therefore import more food to stabilise prices.

But all that we would get is supermarkets throwing away even more than 29 tonnes of food a day. And as someone would have to pay for this additional waste, we would more likely see food prices go up than down. Sometimes the simple, standard reasoning gives you unusual results. So it is in property.

In his last policy address, outgoing Chief Executive Donald Tsang Yam-kuen announced that we have 2.6 million flats for 2.3 million households, which implies 250,000 vacant flats, far more than you would expect from the usual friction in the housing market.

If he is right, then a housing shortage cannot be the cause of high prices. There is no such shortage. There is, in fact, an oversupply. In that case, how can an even greater oversupply be the solution?

The chart gives you the clue to the real difficulty. The blue line shows you the Rating and Valuation Department's residential property price index. I have rebased it to a value of 100 for October 1997, the month in which home prices reached their peak before the 1997/98 financial crisis. The index fell to a low of 33.8 six years later. Its latest value is 110.3.

Now look at the red line and read the scale as Centaline's private household affordability ratio, a measure of how much of an average household's income goes to servicing a standard mortgage for home purchase.

This figure stood at over 100 per cent in 1997, implying that home purchase was far beyond the reach of the average household. It is at present 42 per cent, which makes a mortgage a heavy burden but one that can still be carried. This affordability ratio has come way down despite the fact homes prices are higher than they were in 1997.

The reason for the anomaly is quite simple. Interest rates have tumbled over the period.

Mortgage rates that were near 12 per cent in 1997, above the best lending rate, are now under 3 per cent, well below the best lending rate. I know I have already said this several times recently in this column. But if it makes me sound like a looped recording, I am no more one than any civil servant who keeps attributing high housing prices to housing shortages.

The price alone is too simple a measure of housing costs. The decision for most people on whether to buy a home is also crucially based on other considerations, including income, mortgage terms and, most importantly, mortgage interest.

We live in anomalous times, in that central banks around the world have driven interest rates down into the ground in order to stimulate economies that actually need a rest.

We can do nothing about it. Our linked exchange rate to the US dollar makes us a hostage to US monetary policy.

But if we want to make things worse for ourselves, I can think of no better way than creating an oversupply now so that when interest rates finally rise to more normal levels we will get not a property correction, but a property crash. We've done it before.

Maybe we are just condemned to repeat the past.