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CommentInsight & Opinion

Housing market crash would only add fuel to Occupy Central campaign

Grant Chum says with a conflagration over political reform threatening to erupt, officials now have less room to move on the housing front, and the status quo may be the best hope

PUBLISHED : Tuesday, 07 May, 2013, 12:00am
UPDATED : Tuesday, 07 May, 2013, 2:23am

A year ago, I suggested in these columns that Leung Chun-ying's term as chief executive will be judged primarily on how he tackles the twin issues of housing and political reform, and that a stronger advocacy of a coherent ideology on both those issues would be critical to his success.

Since then, these two ostensibly distinct issues have become more interwoven. House prices have soared by another 18 per cent, while the birth of the Occupy Central movement for universal suffrage has aroused serious concern in Beijing and the pro-establishment camp in Hong Kong. In Leung's inaugural policy address in January, constitutional development received only the most perfunctory of mentions - just two paragraphs out of a total of 200.

The danger of not containing the controversy over Occupy Central is patently evident. Yet the key to such containment lies not simply in providing more forceful political leadership on the universal suffrage debate. Ensuring that Hong Kong people are more satisfied over livelihood issues (housing being the overarching one) will also be vital in limiting mass protest over purely political issues such as electoral reform.

On housing policy, after successive tightening measures, the relentless ascent of house prices since 2009 has finally begun to reverse. Does this represent political success? In the short term, yes: a further significant rise in home prices is undesirable as it increases the potential of an asset bubble, further widens the wealth gap and gives the sense that the government is losing control.

Yet very little in terms of a real long-term policy objective is achieved in the event of a house price correction. Even a 25 per cent decline in prices would only take us back to levels that prevailed at the end of 2010 - a time when Hong Kong households were hardly celebrating the easy affordability of housing, and which coincided with the introduction of the special stamp duty measures.

In fact, assuming interest rates normalise over the next several years, nearly 80 per cent of households (the proportion that earn less than HK$40,000 per month) would still find ownership of private housing either unaffordable or relatively expensive (at least those without the aid of inter-generational wealth transfers).

At the same time, such a price decline would have a significant impact on existing homeowners, particularly those who bought homes in the past two years. It also has the potential to drain the current administration of political capital, and so pave the way for a surge in political discontent. The universal suffrage issue and Occupy Central would merely act as convenient venting channels. Thus, in the short term, the best, and in fact only, outcome the government can aim for is for house prices to be broadly unchanged.

But what of the real long-term policy objectives in housing? Leung states in his policy address that he believes it is insufficient to provide government rental accommodation but it is necessary to support home ownership by the middle class as this is "crucial to social stability". This is fine, provided that a chief executive who espouses such a philosophy realises he must then implicitly support a macro and policy context that allows house prices to rise at least in line with inflation in the long term. A macro context where home prices decline in real terms on a prolonged basis is unlikely to create much social stability even as home ownership increases.

There are three prospective paths to increasing home ownership among middle-income households: first, bring about a major price correction; second, have the government subsidise the purchase of private housing at current "peak" prices via equity loans and interest subsidies; and third, massively expand the supply of subsidised housing or hybrid forms of private housing that are restricted in their sale and transfer to first-time Hong Kong buyers, potentially at the expense of traditional private housing supply and government fiscal income from land sales. The first two options are non-starters while the third requires a more radical policy agenda than the current administration is likely to risk.

Unfortunately, with the constitutional reform issue already "detonating" so early in his tenure, Leung may have limited time to chart a more radical course for housing policy. Between now and when the threat of Occupy Central is eventually defused, he needs to minimise the risk of it becoming an umbrella protest movement against the government.

The ultimate irony is that having expended so much political energy in cooling house prices in its first year in office, the administration may have to spend its second year surreptitiously ensuring that there is no disorderly housing crash. Such a crash, with its concomitant economic fallout, could prove incendiary to the political protest of Occupy Central. The strong inverse correlation between economic prosperity and political protest was vividly played out in the early 2000s.

Typically, it takes a livelihood issue to bring out the fabled silent majority for what would otherwise be a purely political cause. Remember July 2003?

Grant Chum is head of Hong Kong equity research at UBS

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This article is now closed to comments

Giwaffe
The housing market used to be healthier: there was more shelter for every income/wealth level, from private to public housing. Since 1984, homes that could be afforded by people of median income progressively disappeared with the rapid rise in the housing market that was unaccompanied by a concomitant rise in the income level, therefore shifting the balance of the housing supply. In such a grave case of market failure, the government should have vigorously acted to fill the housing shortage, yet it stood by relatively complacent on the basis of rhetoric (remember “positive non-interventionism”?). Currently, there are attempts by government to incentivize, persuade, and/or mandate the greed drunken property developers to supply affordable homes. It seems very likely that whatever incentives the government will offer, the property developers will end up with the most benefit with minimal trickle down to the intended beneficiary, the people of Hong Kong.
For reasons of public interest, the government should act instead as a primary housing supplier, providing affordable homes to those who the private housing market can no longer accommodate without injuring the economic interests of existing private homeowners. Definitive actions that could be taken immediately are large scale resumption of subsidized housing construction and very materially increasing income and asset limits for said subsidized housing to capture those currently priced out of the private housing market.
honkiepanky
This article reads like Mr Chum holds a large real estate portfolio and is casting about for reasons why the government should ensure property prices keep going up. The best he can come up with is a contrived story about how falling prices will lead to social unrest because -- hey, 2003!
But this story about the last housing crash confuses cause and effect. In 2003 HK had suffered six years of deflation, unemployment was 8%, and the economy had been flatted by SARS. Falling property prices (and social unrest) were the result of a bad economy, not the other way around.
johnyuan
This comment by Grant Chum who is head of Hong Kong equity research at UBS is suggesting that for Leung to save his political capital, he must prevent a price decline of homes particularly those who bought homes in the past two years. That is to say property price is untouchable and any reform is either non-starter or of great risk as he claimed. In other world, let Hong Kong perpetual its housing policy as an investment tool. Ironically, his claim of his previous year in SCMP that recommended Leung for his success as chief executive was to tackle the twin issues of housing and political reform with a coherent ideology still holds true. Housing reform is depended on political reform.. For me, it is to halt the right-of-abode of mainland immigrants under the guise of family reunion. It will take political courage to confront the government itself as well as the property developers – all the special self-interests. So obviously not all comment – insight and opinion in SCMP are unbiased and helpful. Grant Chum’s critique is one.
captam
@"At the same time, such a price decline would have a significant impact on existing homeowners"
Rubbish!
It is irrelevant to the overwhelming majority of individual homeowners if prices fall even 50%. Their homes should not be viewed as a speculative investments but the roofs over their heads. So long as an owner-occupier retains his home to live in and is able to continue paying off any mortgage, it matters not if market prices fluctuate. It is only landlords and speculators who scream loudly "negative equity" when market resale prices fall below their buying prices. Hong Kong's leaders should not even listen to these people when they deservedly get squeezed.
aplucky1
TOTALLY AGREE WITH YOU
this is exactly what will happen if prices drop, the greedy BIG MOUTHED LANDLORDS AND SPECULATORS will cry like the little B I T C H E S they are
will the government capitulate this time? again
babyhenry
The housing market is overdue for a crash.
And if this add oil to the Occupy Central forces, well it will only mean that it will turn it to another political farce.
the sun also rises
Housing price crash looks highly impossible as no one expects or wishes it to crash ! The writer maybe too pessimistic in this issue.The crash of it of course will add fuel to the upcoming civil-disobedience---'Occupy Central' which both the Central authorities and Leung administration will not like to see it materialize in the end but it surely will take place as a geniune universal suffrage can never be granted to Hong Kong people in 2017 in its election of the chief executive ! Just wait and see how many people actually turn out in July 2014 ! Probably much more than just 10,000 !
blue
"Housing price crash looks highly impossible as no one expects or wishes it to crash ! " Stupidest statement of the year by pflim040!
johnyuan
Solving housing supply and control of house price are two homework assignments to anyone who are interested from sociologist to bank investment analyst. The assignments were created in the colonial time by government and vastly supported by property developers and citizens alike. Everybody got rich – selling land, selling flats and appreciation in investment respectively. It is a property culture unique in the world except to be also to found in mainland China and Macau all of which copied Hong Kong.
In fact, Hong Kong’s housing shortage may never be resolved, not by anyone who take it as an assignment and see it only in the context of the assignment – how to increase supply? This is dead wrong way to view at the problem. We all should ask why there is such great demand for housing despite a decline of birth rate in Hong Kong over the years.
A narrow tax base has forced Hong Kong to adopt artificial increase of population through right-of-abode tapping on the unlimited supply of migrants coming to Hong Kong. It is in this context that the assignments come to existence. So as a property culture becomes the bedrock culture to be defended fully and righteously.
Shortage of housing and rising prices will never be resolved when the right-of abode continue. Otherwise in each of 18 Districts, about 1,000 units (four 30-storey towers) of housing must be built EVERY YEAR excluding those still on the waiting line. Close the source and save Hong Kong.
aplucky1
is this true?
what I understand there is over 250k of empty units here
I think the problem is the gamblers, speculating
why dont they try the singapore model here-do not let foreigners buy- confine to only selected areas/buildings
why is hong kong selling its very soul for a few coins that are not even NEEDED
johnyuan
Empty flats can occur concurrently with needing flats -- that is to say cage living and subdivided units exist with empty flats. Mathematically, with 150 people re-united family coming to Hong Kong clearly says to house the expanded population and family formation properly one must keep on building housing. It is a no brainer deduction that looking the other way is just a suspect. I hope I can convince you and the rest like you.
XYZ
The CE could begin to reform the housing market by selling off all of the current stock of public housing flats to their occupants.
 
 
 
 
 

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