Defrosting of real estate market comes way too late

PUBLISHED : Monday, 01 January, 1996, 12:00am
UPDATED : Monday, 01 January, 1996, 12:00am

THE government initiative to relax some of the restrictions on sale arrangements for residential property is a classic case of too little too late.

As long as nine months ago the residential market appeared to have thoroughly cooled off from the heady days of 1993 when new unit prices seemed to rise in double-digit percentage leaps month-on-month.

Year-on-year property prices were more than doubling as speculators had a field day and home owners counted their gains on a weekly basis.

On Friday, government mandarins in the Housing Department finally got around to acknowledging the residential property market was no longer in an overheated state, almost two years after the cool-off began.

The pre-sale period for the sale of flats ahead of the completion of a residential property development has been extended from nine months to 12 months.

This offers the developers a higher degree of flexibility in arranging financing and in managing the cash flow of a project, as well as the final booking of gains in corporate accounts.

Deposits paid by buyers will no longer be directly linked to a particular flat in a development. This offers a degree of flexibility to the buyer who may, in a new development, choose to buy a different flat on a higher floor or with a better view in the same complex should a new phase come on stream or buyers in the same complex decide not to follow through on a purchase.

The infamous balloting system where lots are drawn for flats in a new complex when it comes on stream is being changed. It was found that not all those who registered for the ballot and whose names were successfully drawn took up their purchase entitlement. Previously, a whole new ballot was needed to clear the remaining flats.

Now more names can be drawn from the original ballot to clear the units left over when not all those who registered take up their purchase entitlements.

These are rather modest reactions to what some analysts are increasingly calling a crisis in supply over the next two or three years.

The restrictive buying arrangements were originally brought in by the Government in a series of anti-speculation measures, the first of which was launched in November 1991, with changes to stamp duty payment. The 70 per cent loan limit for residential property was brought in during 1992.

The Governor got his task force off the ground later with a series of recommendations to put in place fiscal breaks on speculatory activity.

Despite the attempts to hold back the runaway property market, monthly sales and purchase agreements issued by the Government shot through the roof.

Average month activity in the period 1979 to early 1985 was below 5,000 units a month. The average stepped up from 1985 through to 1990 to between 6,000 and 7,500 a month. The asset inflation boom that struck Hong Kong from 1991 to 1993 saw monthly sales activity rise to more than 22,000.

Sales activity collapsed and with it prices slumped by more than 35 per cent from their peak in the first quarter of 1994 because the United States Federal Reserve turned the world of property, equity and bond investors upside down by unexpectedly raising the Fed funds rate in February.

Like a huge balloon with a hole punched in it, Hong Kong's liquidity boom deflated first in the stock market, falling more than 30 per cent in 1994 and then in the property market.

For all their efforts and grand statements the government mandarins' attempts to interfere with the property market completely failed. Having failed to stop a boom the government mandarins have now failed to stop a slump in the sector the likes of which has not been seen since records were first kept in the early 1970s.

The aim should have been to bring market forces into line and trim the residential sector back to some kind of equilibrium, but instead the number of consents to start work on private residential flats has shrunk to near zero.

Between July and August total consents were 1,446 flats. The residents of Sha Tin will be pleased to know an extra 19 flats will come on stream in three years' time as a result of the consents given in the summer.

The historic average over two decades of supply in the private residential property market runs at about 22,000 to 24,000 new flats a year, bringing on something like an extra 2 to 3 per cent supply annually. Supply between now and the end of 1998 is expected to decline to a yearly average of fewer than 15,000 flats.

Average commencements a year from 1984 to 1993 included 30,890 flats. This compares with 12,500 commencements in 1994 and about 13,500 to the end of September in the private sector in 1995.

It is no wonder Secretary for Housing Dominic Wong Shing-wah, in an interview last week, was forecasting commencements and supply would double in the coming years. If they do not, you are going to see something akin to a disaster in the property sector with chronic supply shortages and a new extended round of price inflation.

Price inflation in the residential property sector just happens to be the exact opposite of what the Government intended.

Mr Wong was forecasting between now and 2001 there would be 195,000 new private flats coming on to the market. This would take average annual supply to 32,500 flats a year, near the historic average of the last 10 years.

Exactly what evidence he has for this claim is not known, but it is certainly not reflected in consents to commence work.