Tom Holland looks at why a plan to give HK people homes won't work

A closer inspection of CY Leung's plans to make property more affordable for local people reveals that it is simply a cosmetic gesture

PUBLISHED : Monday, 10 September, 2012, 12:00am
UPDATED : Monday, 10 September, 2012, 10:36pm

The Hong Kong homes for Hong Kong people initiative announced last week by Chief Executive CY Leung will make zero material difference either to the affordability or to the availability of housing in the city.

To see why, let's do a simple back-of-an-envelope estimate.

Last Thursday the government announced that flats to be built on two sites at Kai Tak - one of 0.77 hectares, one of 0.86 - will be earmarked for sale to Hong Kong permanent residents only.

Let's assume that the companies which buy the sites go ahead and develop them with the maximum permitted plot ratio of 7.5. That means they'll build up to 1.32 million square feet of housing, or around 2,000 flats.

Next, let's assume that that those 2,000 flats are not additional. In other words, that the developers would have built the flats anyway, even without the condition that they can only be sold to Hong Kongers - a reasonable enough assumption considering the sites were already on the government's land sale list.

Finally let's assume that currently 20 per cent of all new flats sold in Hong Kong are bought by non-residents. That sounds high - no one knows the true proportion - but it gives us a number to work with.

So, without the Hong Kong homes for Hong Kong people restriction, 1,600 of the new Kai Tak flats would have been sold to permanent residents. With the restriction, all 2,000 will go to local buyers. In other words, the Hong Kong homes for Hong Kong people programme will increase the supply of flats for local people by just 400 units.

Over the last three years developers have sold an average of 14,000 new flats each year. That means the government's new scheme will increase the supply of flats available to local buyers by less than 3 per cent.

That's not enough to have a noticeable affect on either property prices or availability.

As a result, you have to conclude that CY Leung's Hong Kong homes for Hong Kong people scheme is a cosmetic gesture, rather than a serious plan to improve affordability.

There's an old joke about the European Union which says that heaven is a place where the pop groups are British, the cooks are French, the lovers are Italian and monetary policy is run by the Germans.

In hell, on the other hand, the pop music is French, the cooks are all British, the lovers are German, and monetary policy is in the hands of Italians.

Following the announcement last Thursday by European Central Bank boss Mario Draghi that he stands ready to support crisis-hit European governments by buying unlimited quantities of their debt, German economists fear the euro zone is now heading for the monetary equivalent of hell.

The markets don't see it that way. Southern European bond yields fell steeply on the news, while global stock markets rallied, with Hong Kong's benchmark Hang Seng index climbing 3 per cent on Friday.

But sceptics warn that Draghi's pledge changes the whole nature of Europe's currency union. They believe that unlimited bond buying by the ECB will amount to debt mutualisation by the back door, with Germany ultimately footing the bill for southern Europe's fiscal incontinence.

The ECB's undertaking to soak up any extra liquidity it creates with its bond purchases is not enough to convince one prominent Frankfurt-based economist, who dismisses this sterilisation promise as "marketing".

As a result, he says that although Draghi's plan may stabilise markets in the near term, the excess liquidity created risks fuelling a wage-price spiral in Germany that will push up unit labour costs and undermine German competitiveness.

In averting a crisis in Europe's periphery now, he warns, the ECB risks creating a far bigger crisis in the euro zone's core economy in a few years' time.

"The conditions attached to this are not strict enough," he fumes. "It will turn the euro zone into a kind of Italian currency union."

To the Germans, that's their idea of hell.