Propping up the market

PUBLISHED : Thursday, 19 January, 1995, 12:00am
UPDATED : Thursday, 19 January, 1995, 12:00am

THERE is a saying I heard when I was young that 'bad luck' comes in threes. The property market is in a slump. The Hang Seng Index is sagging. Last week, the third misfortune came, a run on the Hong Kong dollar. Is the storm over? The speculation against the Hong Kong dollar peg to the US dollar though not unexpected, nonetheless shook the market. The devaluation of the Mexican peso gave a lot of foreign investors the jitters causing them to re-evaluate their overseas investment portfolios. However, when the world financial markets and its players equate Hong Kong to a Third World type economy, we better sit up and pay attention.

A run on our dollar may not have occurred if our property market was not in a slump and if our stockmarket was not caught in the same downward spiral. Indeed, about 50 per cent of Hong Kong stocks comprise property or property assets. The slump in the property market started the chain reaction that has plagued us recently. What is happening in the property market? The excessive rise in property prices has stopped but do we have a situation where too much uncertainty in the market, if not rectified quickly may lead to a crisis of confidence? Without stability in the market, buyers will continue to refrain from buying, thus creating a property slump today which ironically will lead to a pent-up demand later on. Looking back at the past 10 years, we can see what has happened when there is a pent-up demand. Prices for residential flats increased dramatically between 1991 and 1994 when the people of Hong Kong regained confidence in the territory.

But before then, we had the uncertainty leading up to the Joint Declaration, the world stock market crash in October 1987, the June 4 incident in Beijing, and lastly the Gulf War in 1990. But in 1991, the pent-up demand combined with investor confidence, a lack of investment opportunities, high inflation and low bank interest contributed to a heightened and perhaps speculative interest in the property market both from local users and investors as well as foreign investors.

What most critics fail to take into account is one plain fact: in real terms the increase in property prices between 1981 and 1991 was zero. This sounds weird but if you take into account inflation between 1981 and 1991 you will gain a better perspective because effectively inflation wiped out any gain in property values over that decade.

WHEN the demand side began its momentum in 1991, after years of lacklustre growth in the property market, it was only natural that supply would be unable to meet this demand. Generally, it would take between three to five years for flats to reach the market.

Meanwhile, housing prices spiralled upwards as the supply of flats was inadequate to meet the home ownership and investment needs. During this period, private developers pointed out many times that the land supply was inadequate for building the necessary flats. The Government finally responded with too many measures, but too late.

The administration introduced measures to curb speculation in the residential property market at the time when the residential market had peaked. Furthermore, the banks were told in November 1991 to limit the amount they should lend on residential mortgages.

Interest rates were rising at an unexpected pace in America which led to increases in Hong Kong because of the HK-US dollar peg. The latest Sino-US trade row has also affected local sentiment and will not help restore confidence if the situation is not resolved satisfactorily.

These have all contributed to the uncertainty in the property market. What can the Government do to stabilise the property market? First, remove the restriction on the banks to cap their mortgage loans at 70 per cent of the residential price. Let the banks be the decision-makers.

Second, remove the restriction on the pre-sale of flats and the re-sale time of flats prior to assignment. These were intended to be short-term measures.

The drop in property prices has been achieved. It is time for the Government to let market forces rectify themselves.