You can't hold back a tide of liquidity with just one finger

Measures announced by CY Leung to hold back rising property prices are about as realistic as the little Dutch boy holding back the North Sea

PUBLISHED : Tuesday, 04 September, 2012, 12:00am
UPDATED : Tuesday, 04 September, 2012, 10:07am

Do you remember the story about the little Dutch boy who stuck his finger in the dyke?

If you don't, it goes something like this: a little Dutch boy was walking along one day by the dyke, the earthen wall that protects the low-lying country of Holland from the North Sea.

As he walked along, he noticed water spurting through a hole in the dyke. Quick as a flash, he plugged the leak with the only thing he had to hand: his finger.

And there he stayed all through the cold night, bravely stopping the hole with his finger. Only in the morning was he found at last by the villagers, who repaired the dyke and hailed the little Dutch boy as a hero for saving Holland from inundation by the North Sea.

I never believed a word of it. Anyone with half a brain would have run for their lives. Sticking a finger in the hole would only have enlarged it. If he had tried, our little Dutch boy would have been engulfed by a cascade of seawater and mud.

CY Leung reminds me of that little Dutch boy. Last week his administration announced 10 measures intended to hold down rising property prices. They are likely to be as effective in containing the tide of liquidity washing around Hong Kong's market as the Dutch boy's finger would have been.

Still, you can see why CY feels he has to do something. As the first chart shows, Hong Kong home prices have now climbed by an astonishing 88 per cent since the beginning of 2009.

Following the run-up, the downpayment on a typical flat now amounts to around four years of gross annual income for the typical family.

That means buying a flat is out of reach to the majority of the 48 per cent of Hong Kong households who do not already own their own home.

As a result, CY is facing a chorus of protest from political critics who regard home ownership as a civil right and from middle-class families desperate to get a foot on the property ladder before prices rise any further.

CY's response last week focused on increasing supply. Some 830 subsidised home ownership scheme flats will be sold off next year, with pre-sales on a further 1,000 planned properties set to follow.

Meanwhile, the Lands Department will accelerate approvals for further pre-sales as well as stepping up land sales and rezoning more areas for housing. Some old industrial buildings may be converted into flats.

These efforts to increase supply will do nothing to improve housing affordability in the foreseeable future, except, that is, for the handful of buyers lucky enough to score one of the few subsidised flats on offer.

The truth is that Hong Kong is not short of housing. As the second chart shows, the growth of Hong Kong's housing stock has comfortably outstripped the city's household formation rate since the handover in 1997.

Yet still prices continue to rise.

The reason, of course, is that in Hong Kong people do not buy flats as homes so much as investments.

In the current environment of low interest rates, with the return on bank deposits derisory and mortgage rates barely higher than the rate of consumer inflation, investors who can muster the necessary cash downpayments have every incentive to buy flats as a store of value.

CY's supply side measures won't change that.

Indeed, if the US Federal Reserve does what many analysts expect next week and announces a new round of quantitative easing in a bid to inject some vim into the ailing US economy, it is likely that a fresh influx of liquidity into global asset markets will continue to push Hong Kong property prices higher, regardless of any near-term measures CY's administration is likely to take.

You can't hold back the sea by sticking your finger in a leaky dyke.