The unintended consequences of Hong Kong's property policies

From 85,000 new flats a year proposed by Tung to the recent increase of stamp duty, our officials have achieved the opposite of what they wanted

PUBLISHED : Friday, 29 November, 2013, 4:27am
UPDATED : Tuesday, 03 December, 2013, 8:59am

Hong Kong officials invariably mean well. But it is uncanny how often government policies end up achieving not their intended effect, but the exact opposite.

Nowhere is this more true than in the property market.

Just consider the housing policy announced by the first post-handover administration. In a bid to boost his popularity, then chief executive Tung Chee-hwa promised to achieve a 70 per cent home ownership level within 10 years. To hit that target, he would back the construction of 85,000 flats a year by the public and private sectors combined.

In an overblown market that was already beginning to slide, it was exactly the wrong policy. Homeowners blamed the building plan for exacerbating the slump, and Tung's popularity ratings plunged.

Finally, in mid-2000, with home prices down 50 per cent, the government executed a U-turn, announcing that it had abandoned its policy. Instead of building, it would suspend land sales in an attempt to support the market.

The result of that U-turn is today's shortage of new housing, a shortage that has helped push home prices up to more than 13 times annual household incomes.

Recent government efforts to rein in the property bull market and make homes more affordable have proved similarly counterproductive.

When the government attempted in October last year to stamp out speculation and cool prices by jacking up its punitive tax on property owners who sell within three years of buying, Monitor warned dolorously that "raising special stamp duty rates will only backfire".

Now, just over a year later, it looks very much as if the special stamp duty has indeed done more harm than good.

It didn't just put new buyers off selling. As Paul Louie, the head of regional property research at Barclays, points out, it also deterred long-time owners. Although they would not have had to pay the duty on their existing flats, any new properties they might buy would be subject to the government's swingeing tax if they then sold again within three years - a big disincentive to selling in the first place.

The consequence was a steep fall in the number of flats for sale on the secondary market.

Naturally enough, the decline in supply helped to support property prices, meaning the increase in special stamp duty rates achieved precisely the opposite of its intended result.

The obvious solution would be to scrap the special stamp duty, but for the time being officials are insisting it will remain in place.

However, at some point over the next three years, Hong Kong housing prices are indeed likely to begin falling as mortgage rates go up in line with interest rate increases by the Federal Reserve in the United States.

And after prices have tumbled by an appreciable amount, say 15 or 20 per cent, local officials will get nervous and begin to look around for ways to support the market. In all probability, they will come up with the idea of finally getting rid of the special stamp duty.

If they do, it will only make things worse. With the deterrent to sell removed, homeowners will rush to put their flats on the market, pushing prices even lower and exacerbating the decline.

Once again, our well-intentioned officials will have achieved the opposite of what they wanted.

When prices do begin to slide, don't expect mainland buyers to step in and support the market.

As recent falls in the prices of gold and fine wines demonstrate, mainland investors are price-sensitive, but in the reverse of the usual sense.

They prefer to buy in a rising market. When prices come off, far from sensing a bargain, they only see a declining possibility of future gains.

As a result, when markets turn, mainland investors are the first to disappear.