How development regulation costs have exacerbated Hong Kong’s housing shortage
Since the mid-1980s, the difference between private residential property prices and building costs have risen dramatically, averaging 70 per cent higher when compared to earlier periods.
This increased gap is a measure of the regulation cost of development and building construction and it explains why development has been slow, why fewer units have been supplied, and why they are fetching much higher prices relative to construction costs compared to the past.
How does the regulation of land development and building construction in Hong Kong delay housing supply?
Regulators seek to minimise incompatible land uses and maximise compatible ones – to generate positive neighbourhood effects and mitigate negative ones. Markets alone sometimes fail to correct for these effects, which is why planning rules and building codes have been invented. Unfortunately their effects on land and housing supply are not always foreseen.
In Hong Kong, there is a belief that rising property prices are the result of a conspiracy between an oligopolistic property development industry and corrupt government officials. The coincidence of four factors has contributed to that belief: a tight, slowly developing housing market, the perception that government has always had a high land price policy, the failure of government both before and after 1997 to sufficiently increase the amount of land for development, and the market dominance of a few large property developers.
