Hong Kong's new disclosure rules on flats not enough

PUBLISHED : Sunday, 31 March, 2013, 12:00am
UPDATED : Sunday, 31 March, 2013, 2:08am

There are few ways to guarantee profits in a free market. One is monopoly; another is asymmetric information. Our largest developers have, for a long time, enjoyed advantages in both. So a new law - which aims to protect buyers from dishonest practices and which takes effect at the end of April - is long overdue. It will help shift the balance more in favour of buyers by requiring accurate information about new flats hitting the market. Unfortunately, it does not go far enough and may not work as intended.

The big developers may not have a complete monopoly, but the few who stand out pretty much dominate the market for new flats. For a long time, they have also enjoyed the control of information about the sizes of flats sold to buyers. This is made possible because there have been no legally enforceable rules about how common areas are calculated to account for the total gross floor area. Abuse is common in the industry, leading to those incredibly shrinking shoeboxes whose living space is often much smaller than advertised.

The Residential Properties (First-hand Sales) Ordinance will ban the use of gross floor area for new flats. In its place, the new standard saleable area is considered more reliable under the new law because it refers to internal flat space plus balconies, that is, the actual living space available. So far, so good.

Now, the new law also forces developers and agents to disclose anything that may "affect the enjoyment" of the property, such as noise pollution or odour from the neighbourhood, and new buildings that may be erected to block the current view.

But one way to maintain the information advantage when you are legally barred from giving misleading information or withholding information is to give too much of it. This is the shape of things to come if the sale of the Riva luxury project by Sun Hung Kai Properties in Yuen Long is anything to go by. Its sales brochures come in three volumes and amounts to 1,500 pages. So information about a flat will look like those IPO stock prospectuses which few people study before making an investment. These are written by lawyers not for the enlightenment of buyers but to protect the sellers and shift away their legal liabilities.

The only way around that is to force developers to provide key-point summaries. Unfortunately, the new law has no provision for that.