JAKE'S VIEW
Jake's View
by

Speculators do not create rising home prices. It’s the other way round – rising prices create speculators

The culprit is extraordinarily low interest rates and this is not just one factor. It is the overriding one

PUBLISHED : Monday, 17 April, 2017, 6:43pm
UPDATED : Monday, 17 April, 2017, 11:00pm

Hong Kong’s home buying fever continued unabated in the first quarter this year ... But industry experts are now predicting the trend to slow considerably after the Hong Kong government on Wednesday issued a new policy.

Business, April 17

There is one aspect of the property market that you would expect outgoing chief executive Leung Chun-ying, a career estate agent, to understand even if the bureaucrats do not.

Speculators do not create rising home prices. The truth is 180 degrees the other way round. Rising prices create speculators.

It is true of all financial markets and, just taking the property market, it tells you that Leung has miscalculated in trying recently to close a speculative loophole in his existing anti-speculative 15 per cent stamp duty on flat purchases.

It will not stop home prices from rising for the simple reason that it is not speculation that has caused prices to rise more than fivefold over the last 14 years.

Speculators only take advantage of rising prices.

Leung could have known it anyway from the results of a series of anti-speculative measures in recent years. The market pauses to digest each one in turn, the government then claims victory in crushing speculation and prices move up again.

A more fundamental force is at work here and, no, it is not a shortage of housing. We do not suffer from a shortage of housing. With few exceptions all permanent holders of Hong Kong ID cards have formal roofs over their heads. Most want better but this is a matter of aspirations, not of shortages.

The culprit is extraordinarily low interest rates and this is not just one factor. It is the overriding one. The price of a home to all but the ultra-rich is not the headline price but the monthly mortgage payment, of which mortgage interest rate is the single biggest variable.

CY Leung has miscalculated in trying recently to close a speculative loophole in his existing anti-speculative 15 per cent stamp duty on flat purchases

Look at it differently. In 2003, at the bottom of the property market, the talk was not of shortage but rather of oversupply. At the end of that year our population stood at 6.76 million and our housing stock at just over two million homes, yielding a ratio of 3.37 persons per flat on average.

At the end of 2016 our population was 7.37 million and our housing stock was 2.287 million homes, yielding a ratio of 3.22 persons per flat.

So how is that high prices now are the result of shortage of housing when there was no shortage in 2003 and yet the population pressure on housing now is actually less than it was in 2003?

The reason, you may say, is that I am looking at this the wrong way. Things are actually slightly tighter when the number of households, rather than population, is measured against our stock of flats.

It’s true. The number of people per household has declined over the years, meaning that the number of households has risen slightly faster than population or our stock of flats.

This is particularly true in public rental housing where average household size was 4.4 persons in 1990. It is now 2.8 persons. This implies that although the stock of public rental housing has risen by 123,000 units since 1990, there are 600,000 fewer people living in them.

It goes to show that misuse results when prices are artificially reduced too far. Average public housing rent is about HK$1,500 a month at the moment, far below cost or fair value for the land and buildings. It constitutes some of the cheapest formal urban accommodation on earth.

And what we now find are waiting lists heavily comprised of students and, among the tenants, a disproportionately high number of divorcees who have disregarded the real accommodation costs of breaking their relationships.

None of this constitutes shortage. It has only to do with housing aspirations or delusions about the real cost of housing.

It is interest rates or, more specifically, the US Federal Reserve Board’s misguided efforts to destroy the price of money, that have got us into this fix of ridiculously high home prices.

And there is nothing we can do about it short of breaking our peg to the US dollar, which may have even worse results.

So we thrash about instead with pointless anti-speculation taxes.

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