Dwindling supply of new flats to call developers' bluff
Forget rising interest rates and developers' complaints that the government is setting land prices too high. Today's auction of three residential property sites should go off like a rocket, almost certainly raising more than $8 billion.
It is easy to see why. This is the first government auction of residential land for almost a year and concerns are rising that a constricted supply of building land now will translate into a shortage of new flats in three years' time.
In the first half of this year, construction work started on just 6,600 homes. In annualised terms, that is down even from the low levels of the past two years (see chart).
Given that it typically takes three years to complete a development, property analysts are already predicting that the supply of new flats will drop to about 18,000 in next year and 15,000 in 2007. With little land reaching the market this year, there are worries the number of new flats completed in 2008 could be even lower.
The shortage of land has triggered complaints from property developers that the government is being too miserly about releasing new sites. In truth, however, there are 29 residential sites available for auction on the government's application list. That adds up to more than 22 hectares of building land or almost 2.4 million square feet.
Until now, none of this land has come up for auction. The problem, say the developers, is the application list system itself. This was introduced in 1999 to replace the old system of regular auctions, in an attempt to make the land supply more efficient by answering to market forces.
Instead of the government arbitrarily decreeing which properties would be sold and when, the developers now determine which sites come up for auction. If a developer makes a proposal that meets the government's reserve price for a site - or 80 per cent of the reserve price since the system was tweaked in June - it automatically triggers an auction.
If no one bids higher, the developer who initiated the auction has to pay up.
The trick is that the reserve price is secret. It probably has to be to prevent collusion among the developers, but critics call the system opaque. Certainly, developers have proved reluctant to risk overpaying by filing proposals that they could be held to if no one else steps forward in the subsequent auction. As a result, the developers have repeatedly priced their proposals too low to meet the government's reserve prices, which is why there have been no residential land auctions since last October.
The developers accuse the government of setting reserve prices too high, but their complaints ring hollow. It is hard to feel sorry for the likes of Sun Hung Kai Properties, which boasts a 35 per cent margin on its developments.
The government's reserve prices may well be high. It is in the business of generating revenues from land sales which allow it to keep tax rates low. That would be a problem if high reserve prices were driving flat prices out of the reach of most buyers. But they are not. Despite recent interest rate increases, flats are more affordable today than at any time during the 1990s.
The problem is that the developers have been reluctant to stick their necks out making closed bids when they cannot easily gauge the competition. But, as today's sale is likely to demonstrate, they will still be prepared to bid high in an open auction for desirable sites.