Overbuilding a greater evil than overpricing
One of the bigger headaches Asian economies face at the moment is overbuilding, induced by years of easy money before summer last year. It is to be seen everywhere, from the ambitious Petronas Towers in Kuala Lumpur to 30 per cent commercial vacancy rates in Bangkok.
From this observation it is an easy step to attribute Hong Kong's difficulties to an inflated property market as well. Prices rocketed last year to levels that put home ownership out of reach of an increasing number of people.
There is a crucial difference, however. In the rest of Asia there was overbuilding without much overpricing, barring some notable exceptions. In Hong Kong there may have been overpricing but there was certainly no overbuilding.
Take the first chart below. It shows the square footage of completed private residential buildings as a ratio of Hong Kong's population. This has come down from a peak at the end of the 1980s of 3.5 square foot per person annually to barely one square foot, and the trend is still down.
In other words, developers may have been charging more for their flats but they have not been building more.
There has been a decline bordering on collapse in private residential construction.
In non-residential construction, there has admittedly been an increase in new completions in the past year, as commercial buildings started in the heady days up to last summer were finished.
But look at it another way. Take the square footage of non-residential buildings for which consent to begin work has been granted and set it against the size of the economy in constant 1990 HK dollars.
The size of the economy works better here than the size of the population, as demand for commercial buildings is more sensitive to economic activity. Put it in constant dollar terms (i.e. strip out inflation) because we are measuring these buildings in floor area, not dollar value.
The second chart shows the result. We have come down from non-residential starts of 54 square feet per million dollars of gross domestic product in 1990 to only 12 square feet at present.
If this economy starts to pick up again, we shall soon have a dire shortage of commercial space.
The difference from the rest of Asia is crucial because any economy suffers more damage from overbuilding than from overpricing. A correction in pricing will undoubtedly affect confidence but it does not represent the gross misdirection of effort in which Bangkok and Kuala Lumpur indulged.
There you have a true wastage of money from which everyone suffers. Overpricing alone may produce chagrined buyers and happy sellers but no wastage of construction effort if the buildings continue to be needed.
The oddity in Hong Kong is that overpricing did not produce overbuilding. One can perhaps set this down to the inefficiencies of Hong Kong's highly interventionist land-use policies.
But then again - and think about it - perhaps in Hong Kong's peculiar circumstances the overpricing is not really quite so acute as we have all assumed.