Cooling measures likely to have a limited effect

PUBLISHED : Sunday, 22 August, 2010, 12:00am
UPDATED : Sunday, 22 August, 2010, 12:00am

New government measures were introduced with much fanfare slightly more than a week ago to rein in property prices, but already their effectiveness is being questioned. The number of transactions at the most popular private estates dropped noticeably, but higher-than-expected land sales on Tuesday look like reviving market enthusiasm. Already, home sellers have reportedly marked up their prices in Hung Hom and Ho Man Tin after Cheung Kong, the city's second- largest developer, successfully bid for two prime sites in those districts.

Cheung Kong is paying HK$7.61 billion for the two sites, exceeding the market forecast by at least 20 per cent. This is clearly a bullish bet that the property market will continue to rise. The auction was supposed to be a subdued affair after the government measures, but when a developer of this stature puts its money where its mouth is, its action is far more persuasive to market participants and speculators than any government cooling measures.

Certainly, it is desirable a slowdown in home prices is desirable at this time. Market players and economists can debate endlessly about whether a bubble exists in our property market but what is clear is that runaway prices are causing social discontent. Home ownership is increasingly beyond the reach of ordinary people. Even a couple with a reasonable income now find it difficult to find an affordable home. Many middle-class families and first-time homebuyers feel frustrated. As a result, property developers and government officials have increasingly come under attack. Regardless of whether such criticism is justified, the anger and frustration is real.

Mindful of such discontent, the government has rolled out cooling measures twice since April. Developers were told to give timely and transparent information to prospective buyers; stamp duty and mortgage down payments were increased; rules on the resale of uncompleted flats were tightened. All these measures are sensible, but clearly not sufficient. Strong economic fundamentals exist to support high property prices. Low interest rates, tight new housing supply, high liquidity in the system and the threat of inflation - all these contribute to boosting prices.

More importantly, the government has promised to release more land for auction. But a fundamental conflict of interest exists for the government. It needs robust land sales to sustain revenue, but large developers are unlikely to pay exorbitant prices if they think the supply of land will grow drastically. The last thing the government wants is to undermine market confidence and the hard-earned assets of home-owning families. Officials, therefore, have to perform a fine balancing act. Most likely, they will continue to sell select prime sites at high prices. But it should make available smaller plots in less desirable areas for the development of less expensive flats. It is unlikely, though, to revive the Home Ownership Scheme.

In a low-interest environment with high liquidity and limited leverage, officials are fighting against strong fundamental economic forces. Today, many buyers, especially those from the mainland, are loaded with cash. Any government cooling measures are likely, at best, to have a limited effect. The gradual release of more land may be the least disruptive to the property market. But it will be a challenge to make available more affordable homes without undermining confidence in the property market or seriously intervening in it.