• Tue
  • Jul 29, 2014
  • Updated: 1:42am
Monitor
PUBLISHED : Thursday, 17 January, 2013, 12:00am
UPDATED : Thursday, 17 January, 2013, 7:39am

CY's well-intentioned housing supply policy likely to backfire

There's a real danger that new flow of flats will reach market just as mortgage rates go up, sending damaging waves across the economy

BIO

As the writer of the South China Morning Post’s Monitor column, Tom Holland attempts each day to make sense of the latest developments in business, finance and economic affairs in Hong Kong and mainland China.
 

In his first policy speech yesterday, Hong Kong Chief Executive Leung Chun-ying announced plans to ramp up home building.

It's a well-intentioned move aimed at tackling the crippling supply shortage Leung blames for pushing housing prices and rents up to unaffordable levels.

Unfortunately, his new policy is likely to backfire spectacularly.

"Supply shortage lies at the heart of the prevailing housing problem," Leung declared yesterday.

At first this sounds like a reasonable deduction. As the chief executive pointed out, over recent years the number of new homes built in the city each year has tumbled to less than half that of a decade ago.

Over the last five years, developers have completed on average only around 10,000 private homes a year, while the government has added some 15,000 public rental flats, making a total of 25,000 new homes a year (see the first chart).

Over the same period, thanks largely to marriages, divorces and immigration, the number of households living in the city has grown at an average rate of around 28,500 a year.

The result of this under-supply, says Leung, is an acute housing shortage that has pushed the price of a new flat beyond the financial reach of many middle-class families and left more than 200,000 households on the waiting list for public rental flats.

Leung's solution is to bump up the supply of new homes. According to the plan he outlined yesterday, by 2017 the number of new public rental flats being completed should rise to 20,000 a year.

On top of that the government will build an additional 17,000 flats a year for sale to the public at subsidised prices. Meanwhile, the number of private sector completions is projected to double over the next few years to 20,000 a year.

In total then, over the next five years the supply of new homes should climb from 25,000 a year to more than 55,000. In the longer run, Leung pledged to increase the supply of building land to meet the city's future demand for housing.

This all sounds splendid, except there is a real danger that Leung's counter-cyclical attempt to make housing more affordable will end up providing enough pro-cyclical momentum to turn any coming property market correction into a full-blown slump.

At some time over the next few years the US unemployment rate will fall below 6.5 per cent, at which point the Federal Reserve will begin raising interest rates. Extrapolating the trend rate at which unemployment is currently falling, the first increase is likely to come early in 2015 (see the second chart).

At that point, the Fed might find itself forced to raise rates fairly aggressively, if it is to keep inflation in line with its 2 per cent target.

In other words, Hong Kong is likely to find itself facing sharply rising mortgage rates just as Leung's ramped-up supply of new homes reaches the market.

The effect would be devastating. At the moment, with interest rates at record lows, servicing a typical mortgage costs around half of median household income. As a result, any increase in interest rates will soon make paying a mortgage unaffordable for many homeowners, triggering a spate of sales and forcing down prices.

At the same time, the increased supply of public rental housing will reduce demand for rented accommodation in the private sector, pushing yields down and making property less attractive to investors.

The result is likely to be a nasty slide in property prices that could leave many recent buyers in negative equity.

Worse, it will erode the value of the only collateral that many local entrepreneurs have to offer against working capital loans for their companies, hammering business activity, job creation and economic growth.

At that point, no doubt, the government and developers will stop building. But the damage to Hong Kong's economy will already have been done.

tom.holland@scmp.com

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This article is now closed to comments

whymak
All points you make here are plausible. But are they doable?
At the root of the problem is Hong Kongers' irrational expectation that real estate has the best store of value, one based solely on past home appreciation. Only fools believe something would grow to the sky. That’s why Hong Kongers accept low rental yield.
Changing investment attitude and behavior takes decades.
Another reason against your good arguments is it is much easier to concentrate spending into few major construction projects instead of upgrading scattered properties into affordable flats for middle and lower income folks. But creating the bureaucracy to administer rental properties that won't continuously hemorrhage public funds presents another uncertainty.
Germany should not compared with other Western countries, let alone Hong Kong.
Unlike France or the UK, Germany doesn’t have wildcat strikes. When IG Metall establishes some guideline, it sets a constraint for other labor contract negotiations. In Germany, firms have labor representatives on the board, which is not what you find elsewhere.
Whereas in Hong Kong, we have a sizable population of self-hate nihilists, whose sole interest is to subvert China and our one country two systems, Germans are disciplined enough to resolve their regional differences for the interest of the nation, their federal system notwithstanding
caractacus
Tom, you are arguing from the position of those who bought into a massively inflated property market, some out of out of desperation to get onto the ladder, but at some point in time property values must reflect the capacity of people's incomes to pay mortgages and that point was passed long ago.
The present crazy priced property market has to deflate in order to restore sanity and prevent the whole population becoming economic slaves of the greedy, amoral developers. Who ever heard of property developers making 5 to 6 times their investment, dominating an entire economy and shafting buyers? Where else in the developed world does this happen? Bow Tie and Hooray Henry deliberately made this come about. Time for the filthy, corrupt developers to get shafted back.
Get real and grow up.
Byebye
Mr CY Leung and your team: please continue the good work. No need to compare to Singapore or anywhere. There will always be arguments or disagreement whether you build or not to build. Your idea to build a roof for the less priviledged so that they need not live in shoe boxes is the best to happen to Hong Kong. No fear of the priviledged few, make correction on the unreasonable, unaffordable prices of homes, and even if the wealth of such priviedged fews is corrected by 50%, they can still live in their huge mansion. Is it a bad idea to rewrite finance for Hong Kong? Greedy individuals, e.g. real estate speculators, stock market speculators or gamblers etc. deserve to be burnt. Hong Kong is physically a small place, and an over populated city, but if things work well with China (Hong Kong is under China), consider expanding Hong Kong' s expertise to nearby places in Guangzhou where there are more land. We live on water provided by China, fodstuff imported from China etc........, and if brilliantly good ideas can be fostered with China, its present newly elected leaders may be willing to work together with Hong Kong. Always remember most Hong Kong people's ancestors were originally from China, we are now part of China, lets move on for the good of Hong Kong.
SpeakFreely
Tom, before any crash always people like to jump into it, what can the government do? Example, the dot com, the 1997 to 2003 crash, the USA 2006 housing. History will repeat itself. For HK I keep telling people will crash eventually for 2 reasons: interest is already at rock bottom and the housing price is too high in terms of multiple of people salary. In US, avg wages is US$24 per hours but median house price is only Usd 150k. That's why I have been buying Bank of America stocks and price up 100% this year! As mortgage risk is very low there.
HK problems is so structural that no one can actually solve the problem unless we all collectively bite the bullet together and compromise. hK people need not to argue anymore but just ask oursleves do we want to keep living in shoes box or follow the pattern of Singapore having a much more space and blue sky. But when I talk to HK people most will defend that "I don't want to live without freedom like the Singaporean...." If that really true that HK has more freedom or right of freedom than Singapore that justify for many living in coffin homes or average family of 400 st ft of space? It is the decision of HK people I believe.
SpeakFreely
First I must declare I am not a Singaporean and I'm a landlord. Some PD or politicians argue HK can't be changed because CY has trust issue that can't rule HK like today in the radio one of the host lady kept challenging him on that. But , think! Even today we installed a person like the equivalent of Lee of Singapore to revamp HK, it won't work. Why?
Because we are now at the stage of no going back. We have now so many stakeholders in HK fighting for their own benefits. House price down will make many people angry and they are the more powerful people. Environmentalist will stop all developments similar to the singapore style of using park lands for development. hK population can't be totally controlled either as some of that is not under our control.
So even there is a blue print from Singapore, a similar small Asian place, but we still can't follow because of HK people issue.It is impossible to have blue sky and a space that you can get in HK. I would encourage HK young people to leave HK for a better life. Period.
SpeakFreely
I don't know whether you all notice that when Leung speaks to the media outside the Government Office, there are always hundreds of protestors screaming and yelling that almost impossible for me to listen clearly or for leung to speak clearly. You may argue this is HK style or showing our freedom but this is not heard of in the west. Why can't the official to rearrange the place to be held inside the building to allow more quite place for officials to covey their message clearly? Even a simple thing like this can't be done on HK, that's what I am trying to illustrate how bad and sick is HK.
captam
The property "slump", as you call it , is coming anyway. A price correction of asset values is long overdue and is unavoidable due to the stupid economics practiced by the American FED over the past few years. You are attempting to rewrite future history by claiming that the inevitable correction and pain will be because of actions now being taken by CY Leung. If you are looking for local officials to blame, Donald Bow-tie , Mop-hair Tsang and Hooray Henry should have reined in this property asset inflation and squeezing of the poor long ago. Negative equity is in any case all relative and nothing to be scared of for the average single home owner, because he still keeps his home over his head so long as he maintains his mortgage payments. The majority of these single home owners won't fall into negative equity even with a 50 % fall in flat values. It's only the property speculators and multi-property owners/landlords who have over-geared themselves, who all shout "foul" when the banks ask them to pay back their property loans.
maecheung
Agree with your comments about the speculators. I don't feel sorry for them at all if there is actually a major property correction! However, the government should step in to help the single home owner (if needed) should the situation arise.
SpeakFreely
If you look at the money supply in China, you would not condemn US Fed.
mercedes2233
And what does the writer suggest? It is not enough just to point out the CE's shortcomings.

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