Wealth divide has roots in land policy
Few things are more absurd than government comments on the property market. Most of the time, officials claim they do not interfere with it, that prices find their own level. But when prices spike, Chief Executive Donald Tsang Yam-kuen first suggests that measures will be forthcoming to prevent a new bubble, then subsequently promises that the measures will not depress home prices. Meanwhile, the Monetary Authority takes its own measures to cool the upper end of the market by capping loans.
The reality is that the government has always been the main influence on property prices, primarily via its land sales and land-use policies and, to a minor degree, through its ability to influence mortgage credit. That has long been the case but, in recent years, the control has become even tighter with the government not merely determining the rate of supply of new land but manipulating the price through its application list system. The latter is a disgrace - untransparent and an invitation to corruption.
Housing production is an at all-time low as a result of government policy. This not only sustains high prices in the urban area but is a huge barrier to further expansion of home ownership even at a time when interest rates are at abnormally low levels.
Government policy is also strengthening the already tight grip of the clutch of tycoons who back Tsang in return for a say in policy. They are the ones who control much agricultural land and can time their applications for conversion to residential use. They are also the only ones big enough for the mega projects of the government entities involved in flat production - the MTR Corporation and Urban Renewal Authority.
The system is exacerbating Hong Kong's already massive income distribution problems and creating a vast class of rentiers who can live an easy life on the income from one or two properties bought 20 years ago.
A secondary impact of government policy has been to favour the better-off homeowners. The differential in prices per square foot between the upper middle of the market - say, HK$12,000 per sq ft - and the bottom, at around HK$2,750, does not just reflect location. Everywhere, the bigger the flat the higher the per-square-foot price. Much of this is simply due to income levels, over which the government has no control.
But the shortage of supply in the urban area is a result of years of failure to allow conversion of industrial buildings to residential use. Now that is being eased, but only temporarily and in a manner that is sure to be interpreted in an arbitrary fashion.
The policy has pushed lower-middle-income earners into the New Territories, where time and travel costs act as an impediment to value. The only winners are the so-called indigenous villagers whose mafia makes it a no-go area for officials supposed to be implementing land use and environmental laws. Meanwhile, the small-house policy provides for instant profiteering and creates a hideous semi-suburban sprawl. What is needed is an announced plan for medium-term yearly land sales, to break those into smallish lots to enhance competition, and preferably to have a tender system to try to avoid the manipulation that has occurred at public auctions in the past.
Tsang and Co would do well to spend an afternoon studying the many examples of the damage that high property prices do to economies. As the Japanese found out in 1990s and as Americans and Britons are learning now, high prices are not a proof of success. They are proof of distortion, are a huge burden on the rest of the economy and create socially divisive wealth imbalances.
More than almost anywhere, in Hong Kong the government controls land prices at the margin. It is time its officials stopped lying about this and accepted their responsibility for sustaining a supply of housing to a community which still has huge numbers - not just the cage dwellers - paying through the nose for abysmal housing.
Philip Bowring is a Hong Kong-based journalist and commentator