Credit fever that led to property frenzy is running its course

PUBLISHED : Sunday, 09 May, 2010, 12:00am
UPDATED : Sunday, 09 May, 2010, 12:00am

'The government has great power to ruin the property market but there is little it can do to stabilise property prices during a slump.'

Chief Executive Donald Tsang Yam-kuen

South China Morning Post, May 7

Will wonders never cease? I can hardly imagine a Donald we used to know, the hey-look-at-me-I've-just-made-it-to-the-top-job Donald, being quite so ready to admit that government is often powerless and occasionally does more evil than good.

Let us get one thing straight about these rising property prices that have resulted in a clamour for the resumption of subsidised sale housing. We are talking here of a monetary phenomenon more than we are of a property phenomenon.

We are talking mostly of a credit explosion on the mainland, which the authorities in Beijing themselves set off in the summer of 2008 when they lifted restrictions on monetary growth because they were worried that the financial crisis elsewhere in the world would spread to China.

The result, as the chart shows, is that credit growth on the mainland rose to 34 per cent year on year right through the summer of 2009, high by any standard.

Easy come, easy go. Much of this money went to frivolous pursuits such as fancy cars and property speculation, and a good deal of this property speculation spilled over the border into Hong Kong. Our own monetary authority has been hard at work mopping up the inflow over the last year.

But notice also that the right-hand side of the chart shows mainland credit growth coming sharply down now. The pressure is now also beginning to ease in Hong Kong. These monetary fevers have their natural end, and this one's is approaching.

True to form, however, Donald has now started to crack under the pressure to give prospective homeowners in Hong Kong some relief from rising property prices. He doesn't want to give way. He learned 10 years ago how badly this sort of thing can go wrong, but he cannot entirely resist the din.

We are therefore to have at least a public consultation on resumption of the Home Ownership Scheme, our previous subsidised sale housing programme, which accounts for about 15 per cent of our housing stock and which was finally wound down six years ago.

How badly can things go wrong? Ask our previous chief executive, Tung Chee-hwa, to remember what he would rather forget. He dreamed of a title deed for every household. Many householders listened, bought in, were badly hurt in the subsequent property slump and blamed Mr Tung for it. Donald does not want the same opprobrium.

There were always big unresolved difficulties with the HOS programme, most obviously the inequity of giving a minority of the population a valuable benefit at the expense of a majority not so entitled.

Many of those entitled were not happy anyway. They had to take the flats they were assigned, often far from their workplaces, they faced irksome restrictions on resale and, as many HOS projects were mixed with public housing rental projects, the value of the flats was never as high as it might be in the private sector, even given a very high standard of design towards the end of the programme.

Donald's biggest difficulty, however, is the one he clearly foresees. It would take at least three years to restart the HOS and get new programme flats into the hands of the buying public, while there are already signs that the property market frenzy is abating. Instead of alleviating a boom, an HOS resumption could exacerbate a slump.

But the new HOS flats might not increase the total housing stock anyway. They would have to go to sites already provisionally allocated to private-sector housing. It is either that or build them in the far reaches of the New Territories and risk turning them into eventual welfare slums.

The proponents of a resumption face two logical hurdles. If the underlying cause of the difficulty is a monetary bubble, then the solution is a monetary one, and attempts to wrestle housing prices lower through a resumed HOS programme are unlikely to work. If the problem is one of too low a supply of housing, which may be a contributory factor, then it is as easily addressed by encouraging the private sector to build more as by restarting the HOS.

But it is in the end basically a monetary problem, and when things swing the other way on liquidity measures, the problem will fix itself. All Donald really has to do is wait. Perhaps it is all he had in mind by calling for a public consultation.