Bureaucrats out of step with market in meeting housing needs
with Jake van der Kamp
YOU MAY HAVE noticed some of the laments this newspaper has recently published about the shortage of new housing in the pipeline over the next few years.
It is an old story for property analysts who follow these figures closely but end-of-year reviews by the government have drawn more general public attention to it.
And now, what are we going to do about it?
Answer: Probably the wrong thing, judging by records of the past.
Government has a way of noticing trends in the property market only when they are at least three years into history and then taking corrective action to supply more land or supply less only when the trend has again changed and the opposite corrective action is needed.
But I am afraid I cannot demonstrate this as simply as I would like, so bear with me while I describe the first chart.
The red line shows the government's overall property price index based on an assumed index value of 100 for January 1981. The trick here is that I have made the index proportional to average household income. Where the line rises, property purchase costs absorb a rising proportion of household income and where it declines they absorb a declining proportion of household income.
Thus, turning to the far right of the chart, the red line tells you that property purchase costs at the moment absorb only 70 per cent as much of average household income as they did 25 years ago. Puts a bit of a balance back on property price trends, doesn't it?
Now the blue line. It shows you an index of authorisations to begin new work on residential flats, also based on an index value of 100 for January 1981. The trick in this case was to make it proportional to the number of domestic households in Hong Kong.
Thus the blue line tells you that last year the government authorised only 26 per cent as much new flats construction as it did 25 years ago for any given number of existing households.
Sorry to have made this a little complicated. I have tried to make it simpler but I cannot do it if I am to make my point.
That point is made by comparing the two lines. They show you that prices fell sharply for more than three years after the 1981 bubble but that right throughout this period government was supplying ever more land to the market, exacerbating the collapse of prices.
Things then slowly changed and authorisations came down, reaching a bottom in 1994, just as prices rocketed up, propelled by a shortage of supply. That shortage then continued, leading us to our big property bubble in 1997.
As the excesses of 1997 became apparent, the supply tap was once again opened but again too late. The new supply peaked in 1999 and the homes that were built over the next few years as a result of this oversupply of authorisations contributed notably to the price collapse we suffered until late 2003. Only now do authorisations show any hint of beginning to rise once more but from a record low level and the shortage of supply bids fair to create another property price bubble over the next few years.
Whatever the reason, government seems incapable of looking forward when projecting needed supply. It can only look back and then it invariably gets the cycle wrong, pinching new supply when it should supply the market and supplying the market when it should pinch.
Even then, the evidence suggests strongly that it is now authorising the wrong sort of flats. The second chart shows you that large new flats (1,600 square feet and up) now cost three times as much per square foot as smaller flats (400 square feet and less) where they were at the same price per square foot in 1990.
People have grown wealthier and want bigger homes but cannot find them and must therefore bid up for them on the market.
There is little sign, however, that government has yet recognised this trend or recognised the reasons why it has emerged.
In short, we are out of synch on supply and out of sync on size but all this is just situation normal.