The worst of the global economic crisis may, just possibly, have passed, but another financial storm is gathering force and may soon start to buffet our economy. The threat of a huge asset bubble is rapidly increasing, with the housing market being one of the core problems.
Financial Secretary John Tsang Chun-wah warned in his February budget about the imminent dangers of a housing bubble, and the government introduced measures to try to avert it - such as increasing the land supply and raising the stamp duty on flats costing over HK$20 million.
These measures seem to have been ineffective. From last year until the first quarter of this year, prices for new apartments have risen at least 30 per cent, propping up the secondary market as well. This has barred genuine buyers from the market while fuelling even more speculation. To further tame speculation, the government recently introduced measures to stamp out dishonest property sales tactics and make developers' sales practices and transactions more transparent. If these guidelines didn't work, the government said, it would launch legislation.
In the meantime, it has put up two sites for auction, bypassing the usual practice of processing them through the land application list system, in order to speed up supply. These measures seem to have slowed speculation.
Our red-hot housing market is caused by both external and internal factors, including extremely low interest rates and the creation of excessive credit as a result of loosened monetary policy by Western governments to stimulate growth. Last year brought a surge of foreign capital inflows of over HK$640 billion, of which at least 10 per cent was injected into the property market.
Internally, Beijing's fiscal stimulus measures inadvertently raised the temperature of our housing sector. Last year, the central government allocated 4 trillion yuan (HK$4.54 trillion) to stimulate the economy, while mainland banks granted 9.6 trillion yuan in new loans. Much of this mainland capital has gone into our housing market, pushing up prices. On the supply side, fewer homes have gone on the market in recent years. According to government statistics, an average of 20,000 to 30,000 new homes per year went on the market in 2001 and 2002. The supply dropped to 17,000 per year in 2005 and 2006, dwindling to less than 8,000 units annually in the past two years. The vacancy rate in 2005 was over 63,000 units, dropping to 47,000 at the end of last year. But the occupancy rate has not gone up, despite an improvement in the economy. In 2005 and 2006, the average occupancy rate for new properties was 17,000 units per year, dropping to less than 8,000 units in the past two years. The data shows that high property prices are not caused by supply shortages but by developers hoarding supply. In short, these are all man-made problems, be it developers controlling supply, an increase of cross-border purchases pushing up demand or local speculators.
Those who suggest the government should increase land supply or prohibit mainlanders from purchasing new local properties as a way to dampen the market are talking nonsense. Mainland investors can always find ways to circumvent the rules, such as assigning a Hong Kong agent or using an overseas shell company to make the purchase.
The current guidelines have, to a certain degree, stalled the speculative trend. But, in the long run, the government should reinstate the Home Ownership Scheme to solve our long-standing housing problems. A stabilising factor in society is to allow everyone, especially the younger generation, to share the fruits of prosperity. Making homes affordable is fundamental to promoting social harmony and stability.
But the government still needs to deal with another villain - the property agents - and their sales tactics. It should issue guidelines to increase checks and balances to enhance sales and transaction transparency to minimise dishonest practices. And if they still don't deliver the desired results, bring out legislation.
Albert Cheng King-hon is a political commentator