Out of control

Land sale prices continue to hit new heights - good for developers and the government treasury, but certainly a great worry to those already facing high rents and housing prices as their wages lag further behind.

Affordability, as measured by the ratio of mortgage payments to income, stood at 48 per cent in the first quarter of this year, double that of five years ago. According to the CEIC database, Hong Kong's property price index has been growing at a much faster pace than the index for median monthly earnings (with bonuses) since late 2006, and also faster against the index of nominal gross domestic product per capita since late 2009.

The obvious question is: why are property prices behaving like a wild horse and becoming unaffordable for many? The short answer is that there are buyers who can afford them, and some 40 per cent of the new buyers are from the mainland.

The looming housing affordability crisis feeds into growing social discontent. Many blame the high prices on the insufficient supply of residential land over the years. An increasing and regular sale of land can indeed help to stabilise the market, but only up to a point. The present market imbalance is more than simply one of a shortage of land supply. The ultimate movements in housing prices depend on the supply and demand of built units. Land supply is, at the same time, a zoning problem, as less than 7 per cent of Hong Kong's land is used for residential housing.

Hong Kong is fast becoming a 'national' market for the whole of China, not only in properties, but also in other consumption and investment sectors. Even a tiny percentage of the newly rich and the affluent middle class from the mainland will form a formidable force that easily overwhelms the local property market, further fuelling local expectations.

The boom may well be short-lived if interest rates pick up and Western countries' quantitative easing policy stops. However, an unrestrained market will only make the impact of a bursting of the asset bubble worse; hence the need for a soft landing. While the government should not casually intervene in the market or overestimate the might of its 'visible hand', it cannot stand idle beside a distorted market for both social and economic reasons.

Any short-term government measures to combat speculation (such as a special stamp duty) or additional land supply may easily be digested by a hungry market, the bottom of which is hard to gauge. The government should monitor closely the mainland factor and its medium- to long-term implications on the local market structure, and study the need for restrictive measures.

Restrictions may take the form of confining purchases by non-Hong Kong residents to the higher end of the market, or designating some developments as exclusively for local buyers. This will not necessarily damage our free- market reputation, as some people have warned. Both Singapore and Australia, noted for restrictions on overseas purchases, are still rated as the second- and third-freest economies, after Hong Kong, by the Heritage Foundation. Some critics argue against restrictions and favour expanding public housing - in both rental and ownership flats, similar to the Singaporean approach. Either way will signal a major departure from existing policy.

It is time to embark on a new long-term housing strategy which incorporates measures to target problems on both the supply and demand sides. Supply measures should include regular land sales and the development of new land for residential use, including a review of zoning criteria. Demand-side approaches, apart from anti-speculative measures, should include the revitalisation of the public housing sector and the introduction of restrictions on non-local purchases as a last resort.

The government had valid reasons to retreat from the home-ownership sector in 1998; following the collapse of the property market, it acted to rescue the market.

Now the market has not only rebounded but is seemingly out of control, there is an urgent need to use public housing as a lever against market distortion, to assist the grass roots and middle class who find it hard to satisfy their housing needs in the private market.

Hong Kong's housing policy is at a crossroads. No pain, no gain. One should not expect a policy breakthrough or soft landing without any pain.

Anthony Cheung Bing-leung is an executive councillor and founder of SynergyNet, a policy think tank