The Week Explained: Property buyers must beware misleading information

PUBLISHED : Monday, 21 January, 2013, 12:00am
UPDATED : Tuesday, 22 January, 2013, 1:35pm

A property purchase is likely to be the biggest investment most individual investors will make, but thanks to a combination of government ineptitude, property tycoon propaganda and skilful campaigning by the Real Estate Developers Association (Reda), property buyers find themselves in a market riddled with misleading information.

This is despite or maybe because of new rules introduced by the Estate Agents Authority at the beginning of this month requiring sellers of second-hand properties to provide buyers with precise information about both the net and gross sizes of properties for sale.

This makes one of a hell of a difference because it is common for the usable areas of a property to be something like 40 per cent smaller than the gross area, which has been presented as the benchmark measure of property size.

Since the new rules have come into force some buyers have discovered that they are actually paying more per square foot of usable space in mass-market flats than buyers of properties in posh areas such as Repulse Bay and The Peak.

Instead of celebrating the transparency brought into the property trade by this reform, the property guys have succeeded in putting it about that the new measures are "causing confusion" leading to buyer anxiety.

Meanwhile, since 2008, sellers of new properties have been required to provide details of a standardised "saleable area" but can still advertise their properties according to the old gross area formula. This adds to the confusion as these properties appear to be less expensive than second-hand properties.

The old gross space format allows developers to include the space taken up by lobbies, lift shafts, janitor's cupboards and so on when advertising the size of new flats.

In the widely used euphemism of the property trade the difference between gross and net areas is known as the efficiency ratio - a weasel-like term that puts a positive spin on what in other businesses would be false advertising.

Back in 1995 the Law Reform Commission proposed far more sweeping reforms that would have required the true size of all properties to be disclosed when advertised. Last year, after a delay of almost a decade, a timid step was taken to implement these proposals with the first reading of a bill regulating the sale of new homes. Reda tried to explain how it supported greater transparency in property sales while roundly criticising the bill, even going so far as to suggest that it was unconstitutional.

According to Reda, the draft law covers a sector of the property market accounting for a mere 15 per cent of transactions in Hong Kong. Surely, there should be a law covering all property sales. The government has also given no consideration to protecting the interests of home renters - they are exposed to all kinds of inaccurate information without fear of redress.

And, rather typically, the government is planning to exempt itself from this legislation by ruling that buyers of Home Ownership Scheme flats, supplied by the Housing Authority, will not be covered by the disclosure rules.

Given that this is so, the government's reluctance to create a more transparent property market is all the more disturbing. However, there is no mystery as to the roots of this: it lies in property developers' power and influence.

The government seems to think that Hong Kong's property market is essentially the preserve of property developers. Individuals who own their own homes or other properties for investment purposes are relegated to an inferior place in government thinking.

Contrast this with that prevailing in many other countries where the property market is essentially a consumers' market and stringent legal protection is offered to consumers. Thus, in Britain, for example, property sellers have to give potential buyers a very detailed dossier about all aspects of the property offered for sale. This extends well beyond a mere statement of the property's size and there are severe penalties for misinformation.

Meanwhile, in Hong Kong the government is still dithering over a bill that concerns itself with a small section of the property market and it hopes that somehow or other self-regulation will fill in all the other gaps.