HK officials won't risk blame for a property market quake

The army of Hong Kongers who took to the streets in protest last Friday had a list of grievances as long as your arm. But among the loudest of their complaints was the prohibitive cost of housing in the city. With property prices up 75 per cent since the depths of the financial crisis just two-and-a-half years ago (see the first chart below), the average Hong Kong flat now costs more than 10 times the city's average household income. That's a multiple which dwarfs those seen at the heights of the recent property bubbles in either the United States or Britain. Usually anything over five times is rated 'severely unaffordable'. At these sorts of prices, would-be buyers of even modest family apartments find themselves required to put up the equivalent of more than three years of their entire household income as a down payment on a new flat - a demand which many first-time purchasers fear will shut them out of the property market for good. That's made people angry, and increasing numbers of those unfortunate enough not to own their own homes are calling on the government to engineer a decline in prices so that they can get a foot on the city's property ladder. Yet although we are sure to hear a lot of talk from officials all promising to make home more affordable, the Hong Kong government is highly unlikely to do anything that risks precipitating a fall in property prices. To illustrate why, it may help to change the subject entirely. In the mid-1980s, with America's earthquake paranoia running high, an eminent geophysicist went to the California government with a scheme he claimed could avert 'the Big One' - the much-feared mega-shock which many believed was set to devastate the state's most densely populated areas. He suggested pumping vast quantities of sea water down into California's fault zones in order to raise the pore fluid pressure of their rock formations to a level which would trigger seismic activity. In effect, he was proposing to lubricate the notoriously sticky fault zone, relieving the accumulated tectonic stresses through a series of small, relatively harmless tremors, rather than through one enormous earthquake. The idea was sound enough in theory, but instead of investigating further, state officials rejected the proposal out of hand. Their decision had nothing to do with the plan's practicality. It was driven entirely by narrow political considerations. You see, earthquakes are considered acts of God. No matter how terrible the death and destruction they cause, no one can be held responsible. But if officials start a programme to initiate seismic activity, even with the entirely honourable intention of mitigating the destruction caused by natural earthquakes, they will inevitably be held responsible for all damage done by any subsequent tremors. If their scheme is successful, and a series of small man-made earthquakes avert the Big One, they will be held liable for the minor damage which results, even if it is tiny compared with the devastation they prevented. And if their plan fails to avert the Big One, they will inevitably get the blame for causing the destruction by interfering with nature. Even the best-intentioned officials can't win, so they do nothing. The Hong Kong government is in much the same situation when it comes to the city's property market. Prices are painfully high. But if officials do anything to improve affordability, perhaps by increasing spending on housing after years in which public expenditure was run down (see the second chart below), they risk being held responsible when prices inevitably soften in the future. In political and career terms, it really won't matter much whether their efforts to improve affordability were successful or not. If they act, and prices do fall, the 45 per cent or so of Hong Kong households who own their own private homes will surely blame the government's actions for eroding the value of their biggest single investment. And those 45 per cent - essentially the city's middle class - are a highly vocal political constituency the government desperately wants to avoid upsetting. So it makes sense to officials to do as little as possible about housing affordability. Sure, they will face complaints, but the number of protesters will be relatively small compared with the city's legion of homeowners. And if they do nothing, when prices do eventually fall, they can say the decline, if not an act of God, is at least the result of market forces outside the government's control. Politically, that's a much better option than being held responsible for an earthquake.