Popping the bubble of property at any price

PUBLISHED : Sunday, 29 August, 2010, 12:00am
UPDATED : Sunday, 29 August, 2010, 12:00am

Last week I was offered 25 times what I paid for my flat in 1985. Over those 25 years, consumer prices have roughly doubled. As a result I am vastly better off than a married couple trying to raise a family and pay the mortgage on an absurdly expensive tiny flat. So I should feel happy and rich. But that I am not ecstatic about a huge paper profit reveals much about the absurdity of the belief held by so many, not least Chief Executive Donald Tsang Yam-kuen, that high prices are good for Hong Kong.

I can only realise my huge paper profit if I either leave Hong Kong or move to a smaller or less desirable flat or abandon the family home in favour of renting. Being in positive equity is little better in practice than being in negative equity - a dangerous situation only if interest rates or unemployment result in foreclosure.

Only three main groups benefit from property prices persistently rising faster than inflation and salaries. They are: the government, which controls land supply and collects a large chunk of revenue from land sales, rates and profits taxes; the developers, which profit more from resultant huge margins than from actual construction; and those - like most of the upper bureaucracy - who own more than one flat. They can keep one for themselves and take capital gain on the others. Broadly, as a result of years of price manipulation, Hong Kong now has an aristocracy of inherited-land owners who think they are businessmen but are leeches on those who actually make Hong Kong thrive.

For the majority of Hong Kong homeowners who intend to stay here and do not want to rent, property price rises are almost irrelevant. If anything they are a barrier to improved living because the larger the flat, the more expensive per square foot. For sure, the most recent price surge was mainly due to low interest rates resulting from the dollar peg. But underlying it is the correct popular assumption that the government wants property price inflation regardless of its social and economic cost. Land policy is adding to the wealth gap and making it ever more difficult to bridge the divide between private and public housing.

There is evidence from elsewhere - not least the US and Britain - that property ownership obsessions divert investment from more productive avenues, meanwhile creating a class of rentier capitalists who got on the ladder early. It can also reduce labour mobility, which shouldn't be a problem in little Hong Kong but is because of government policy to dump low-income households in remote areas.

Now the government has come up with yet another feeble reason to suggest that house price inflation is beneficial. It suggests that those who bought 20, 30, 40 years ago can use their property to pay pensions through reverse mortgages. It is easy for bureaucrats with their large, inflation-proof, taxpayer-funded pensions to advise that others have to sell their home to have an income in old age. It is also unfair on an ageing generation which has a right to a return on the HK$800 billion in fiscal and monetary reserves it earned but which the government hoards.

Reverse mortgages are not in principle a bad idea. But even assuming they do not become, like the MPF, a way for the financial industry to gouge the public, they simply transfer wealth from the young generation to the old while the banks take their cut. No wealth creation there.

Ultimately, widespread use of reverse mortgages would be self-defeating. Given how rapidly the population is ageing, the price of such mortgaged homes would slump as supply of them surged.

Meanwhile, high flat prices and the other opportunity costs of child-bearing make Hong Kong women the least fertile in the world. Another record for Tsang to boast of? More likely, it will be the ultimate destruction of the 'property at any price' religion.

Philip Bowring is a Hong Kong-based journalist and commentator