Excluding non-locals from flat sales could easily backfire

Move threatens to bring a triple-whammy to muddy eventual downturn, turning what would have been a healthy correction into a rout

PUBLISHED : Wednesday, 12 September, 2012, 12:00am
UPDATED : Wednesday, 12 September, 2012, 5:23am

Here's a trivia question: what do China, Taiwan, Singapore, Korea, the Philippines and almost everywhere else in Asia all have but Hong Kong doesn't?

You can probably think of lots of things, but in this case the answer is restrictions on property purchases by foreigners.

Now property analysts at brokerage house CLSA are arguing that Hong Kong should slap controls on non-resident buyers in a bid to moderate the city's property cycle.

In a new research report styled as an open letter to Chief Executive Leung Chun-ying, CLSA head of property research Nicole Wong and her colleagues note that between 2004 and 2009, land sales in the city declined by 70 per cent.

Allowing a two-year time lag for development, they go on to point out that over the corresponding period between 2006 and 2011, the city's economy grew by 29 per cent, while the number of middle income families earning more than HK$40,000 a month shot up by 52 per cent.

As a result, Hong Kongers' demand for new homes shot up just as the supply was evaporating.

To make matters worse, the demand surge and supply drought coincided with an influx of buyers from the mainland looking to park their cash.

As a result, the price of a typical 600 square foot apartment in Tai Koo Shing has shot up from HK$2.66 million in 2004 to HK$6.3 million today.

Wong argues the middle class is bearing the heavy cost of this rapid increase by foregoing future consumption of goods and services.

To illustrate her point, she calculates that in 2004 the price of a typical flat would have provided a family of three with rice for 2,750 years. Today it would feed them for 3,855 years.

Alternatively, in 2004 the price of a flat would have sent 17 students to university. Today it would fund degrees for 38.

Like Donald Tsang before him, Leung has promised to address the problem by increasing the land supply.

But Wong argues that land supply by itself is too crude a tool to manage the property cycle effectively.

She notes that land sales have increased sharply over the past two years in response to stronger demand, implying a rise in the number of flats completed over the next year or so.

Wong worries that the influx of mainland buyers will encourage developers to build even more flats.

According to estimates from Centaline property agency, mainlanders now account for 25 per cent of primary market sales, up from 10 per cent three years ago.

The result, Wong warns, could be a glut of supply that exacerbates the fall in prices when the property cycle turns.

Wong believes the best answer would be for the government either to impose heavy controls on non-resident buyers or to hit them with a punitive tax.

"Restrictions on non-local buyers may be politically drastic," she admits, "but realistically they are among the best ways to control developers."

Her idea might appeal to Hong Kong officials desperate to boost the government's popularity. But it could easily backfire.

Given the likely lead time on such a major policy change, imposing controls on non-residents could scare off mainland buyers at the same time as flats now about to be built near completion, and just as the US Federal Reserve raises interest rates, pushing up Hong Kong mortgage rates.

The ensuing result would not be the counter-cyclical moderating effect that the government had been aiming for but a pro-cyclical triple-whammy that severely compounds the eventual downturn, turning what would otherwise have been a healthy correction into a rout.

So although other markets in Asia may well have restrictions on foreign buyers, Hong Kong's government should think very hard indeed about possible unintended consequences before deciding we should have them too.