The limitations of government may sell us a pup on housing
"Supply shortage lies at the heart of the prevailing housing problem … the public and private sectors on average produced only about 24,800 flats each year in the past five years. In mid-2012, the vacancy rate of private residential units was 4 per cent, the lowest in 15 years."
2013 policy address
And at the heart of the supply shortage problem lies a question of numbers. Just how many residential units are we short of the requirement?
In the immediately previous policy address, former chief executive Donald Tsang Yam-kuen said we had 2.6 million homes for 2.35 million households, which implied an overall vacancy rate of more than 10 per cent, an indication of oversupply, not of shortage.
I have been a little uncomfortable with this estimate of our housing stock, however, as it doesn't accord well with figures from the Rating and Valuation Department, which is meant to be the authority in these matters. I now believe that one of Donald's minions may have double- counted the stock of public sale flats. It happens.
But C. Y. gave us no figure for total stock. All he said was that the private housing vacancy rate was 4 per cent, the lowest in 15 years. This doesn't say much. Over the previous 15 years, 4 per cent was the average, not the lowest figure, and the record peak in the housing slump of 2003 was only 6.8 per cent. The official figures say the private vacancy rate has always been relatively low. Likewise, when C. Y. said that the average annual production of flats over the last five years was only 24,800, he somehow forgot to mention that this was also almost exactly the rate of household formation over the period. A supply shortage can hardly grow more acute during a time when new supply matches new demand. Yet home prices doubled over this same period. A riddle.
The answer to this, of course, is not that a supply shortage suddenly emerged where previously there had been none, but that the biggest determinant of affordability, interest rates, went way down under the exertion on our linked exchange rate of an easy money regime in the United States.
The difficulty with blaming the phenomenon of low interest rates, however, is that it is an abstract concept. You can understand it if you bother to calculate how much interest rates affect monthly mortgage payments. You then see it immediately. But without doing this you cannot conceptualise it.
C. Y. and his advisers think of it as shoppers in a fresh market do. A sudden, severe shortage of bak choi can double the price. Nothing else can do it. To bring the price back down, increase the supply. As a career estate agent, he should have learned that the vegetable and property markets differ, but he has either forgotten, or ignores it.
And he ignores it at his peril if he is successful in imposing his remedy of a big increase in supply. He has, in fact, had experience of getting this question badly wrong. He was property adviser to former chief executive Tung Chee-hwa when the two of them heartily endorsed measures started by former governor Chris Patten to bring about a massive increase in housing supply.
It looked to be the way of beating down a property price bubble in 1997. But such measures need time to take effect and, by the time that this one did in 2001, the bubble was already deflated and the massive increase turned a property retreat into a crash that took prices down 70 per cent from peak to trough.
It is not uncommon for this to happen. Government is simply not structured to look ahead and make decisions at odds with general sentiment. It responds to immediate pain and adopts whatever measure seems likely to bring immediate relief.
I shall now pull out my crystal ball. I say that when interest rates finally rise again and property prices fall we will, at the same time, see a 10-year record supply of new housing.