• Fri
  • Apr 18, 2014
  • Updated: 4:12pm
Monitor
PUBLISHED : Wednesday, 12 September, 2012, 12:00am
UPDATED : Wednesday, 12 September, 2012, 5:23am

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

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.

tom.holland@scmp.com

Share

Related topics

3

This article is now closed to comments

xiaoblueleaf
There is no simple answer to a most complex issue. For many years, real estate speculation had been a game for both Hongkongers, then extending to the non-residents.
Hong Kong is different from most other cities in that firstly there is no more land available other than filling up the sea and destroying our environment, and secondly, for various reasons, it attracts much "hot" money pouring into real estate - particularly from China - leading to shortages and sky-high prices making owning of one's residence unaffordable for the average household.
Restriction on non-resident buyers may not be unreasonable provided that such may apply selectively to certain size, price range or locations of properties aiming to benefit the lower- and middle-income groups; particularly government subsidized housing. Other disincentives such as prohibitive taxation on speculative buy/sell may also be applied to discourage speculations. Such policy should not aim to be discriminatory against "foreigners" who may easily gain resident status when gainfully empoyed. Let the non-residents come in buying up multi-million dollar flates!
The day of lassei' faire economy can no longer continue, given today's environment and social conditions.
spyeatte
I've heard of foreign companies in Hong Kong buying flats to be used as housing for their staff. Then when staff are posted in Hong Kong, they need only hand them the keys to a company flat. The rent of a comparable flat is then listed as compensation both for tax and immigration purposes. Thus, both time and money are saved by both the company and its employees as they rotate staff. In other countries that compete with Hong Kong, this may not be possible.
rpasea
"Hong Kong land for Hong Kong" people is a foolish policy especially coming from a CE who is supposedly a surveyor by training. There are so many ways around such a policy and by the time the first flats come on line, the market will have corrected. I hope CY was only engaged in a PR campaign and not real policy initiative.

Login

SCMP.com Account

or