Stop moaning about speculators, they perform a key role for us

PUBLISHED : Tuesday, 19 October, 2004, 12:00am
UPDATED : Tuesday, 19 October, 2004, 12:00am

I DID NOT see it in yesterday's newspaper, but Sunday afternoons are a time for working at hobbies on my balcony at home while listening to Radio 4 (they play the Spice Girls on Radio 3), and every hour the same message led the RTHK newscast.

Yu Kam-hung, chairman of the general practice division of the Hong Kong Institute of Surveyors, believes that 50 per cent of the recent increase in property prices is attributable to speculation.

Only 50 per cent? I would have thought the real figure was closer to 100 per cent. People buy property not when they think it is cheap but when they think the price is going up and speculation cannot be better defined than buying something in the expectation of being able to sell it later at a higher price.

I have been a speculator. It is my bet that you have too if you ever bought property. Would you buy a home if you were convinced that its price on the market would go down? You may want it to live in it but would you buy rather than rent if this was what you thought?

Let us set a few things straight about property speculation.

First, we have the widespread notion that Hong Kong's economy is based on it because, as everyone knows, people here spend all their time talking property, checking out the property market and ploughing their money into property if they have not bought property stocks instead.

Even if this were true, and in my opinion people in Hong Kong are more obsessed with palace politics than they are with property, it would not constitute economic effort.

In terms of gross domestic product, the absolute most that property speculation can amount to in our economy is the sum of private building construction, developers' profit margins and costs of ownership transfer. As the chart shows, this at present constitutes only 8.4 per cent of GDP, the lowest figure in 30 years.

The sums transferred in property trading contribute nothing to economic effort. If they did so, you and I could instantly triple the size of Hong Kong's economy. I would sell you my flat for $1.25 trillion and you would immediately sell it back to me for the same price. Hey presto, there we would have $2.5 trillion worth of property transactions and a $1.25 trillion economy becomes a $3.75 trillion economy overnight.

The fact is that our economy is based on the work we do to earn our money, most prominently financial and professional services involving mainland trade. Property purchases represent how we invest a good deal of that money but that is not the same as earning it.

While Mr Yu may well be right that speculation has figured heavily in the rise of property prices since summer last year, this does not mean speculation invariably drives property prices up. If it were so we would never have had any property crashes. Speculation was always at its greatest just as the market peaked before those crashes.

Property prices went up after the Sars epidemic because they were low by almost any standard you care to employ, having fallen some 70 per cent from their peak six years before, and Hong Kong people, looking at their own suddenly revived fortunes in a resurgent economy, finally came to the view that the market had to turn.

Speculation can exacerbate a property bubble and its subsequent bursting but cannot itself create either of these two events. As an activity it is captive to underlying market conditions.

What it can and does do, however, is provide liquidity to those market conditions. You may be grateful that speculators are active in the market when you come to buy or sell a flat. You would never have the range of bids or offers you enjoy at such times if speculators were not there.

Yes, you may have paid a higher price when you bought because a speculator was there first. Equally, you may have received a better price when you sold because a speculator took your flat off your hands. Bear in mind that an awful lot of speculators were wiped out in the 1997-98 crash. Speculation has never been a one-way street to making money.

So do not ask me to moan about the presence of speculators in the market. It is the way the world is, and it is not necessarily a bad thing.