Price isn't the only figure that counts in housing debate

Hong Kong is obsessed with property prices. For now, negative reactions to high prices have sufficient emotional intensity to dominate the media and influence the government. Unfortunately, if prices drop substantially in the next two years - a likely scenario - the emotional reaction from property owners could dominate, causing the government to scrap any measures for boosting supply.

History may repeat itself. The reaction against high prices dominated right before the 1997 handover. But, as prices collapsed, sentiment completely shifted and the government switched to restricting supply before any supply-boosting measures previously proposed even had a chance to take effect. That reaction laid the foundation for today's supply squeeze, which is partially contributing to today's high prices.

Property behaves like a financial product in the short term. Its price movement is determined by the credit environment. In the long run, the price is determined by the balance between supply and demand. For example, Hong Kong's high prices today average about one month's salary per square foot, five times as high as the price in other financial centres like London, New York, Singapore and Tokyo. In these places, high prices are limited to areas frequented by financial types. Most local residents have access to affordable housing away from the centre. In Singapore, locals live in government-built housing. In Hong Kong, local people, foreign bankers and investment immigrants are subject to the same prices.

One could equally attribute Hong Kong's high prices to easy credit, which is a consequence of the US Federal Reserve's monetary policy, and to a supply squeeze. When the Fed raises the interest rate to 4-5 per cent, a normal range for the US economy, Hong Kong's property prices may drop by half to shed its component from cheap financing.

But, even then, they would still be too high. High prices are why the per capita living space is so low. Considering that urban residential housing takes up a fraction of land here, the norm of high-priced small flats is a choice.

Hong Kong's laissez-faire economy is a myth, played up by libertarian think tanks like the Heritage Foundation that name Hong Kong the freest or the second-freest economy in the world. The foundation knows little about the world and praises city economies like Hong Kong to embarrass the US government.

Here, land supply, the most important input in a city economy like Hong Kong's, is determined by the government. Hong Kong's big businesses and the government have colluded to maximise their income in fixing supply. The cramped housing conditions and high prices are a consequence of this political dynamic. When a monopoly controls housing, the resulting equilibrium is low supply and high prices.