• Fri
  • Aug 22, 2014
  • Updated: 9:37pm
PUBLISHED : Friday, 29 November, 2013, 4:27am
UPDATED : Tuesday, 03 December, 2013, 8:59am

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

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.



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This article is now closed to comments

isn't this what is needed? maybe we should all go back to economics 101?
Who says the consequences of Donald Tsang's policies were unintended? They were fully intended to create an artificial property boom to satisfy the greed of the property lobby. The rest should not have been so hard to see.
How does the stamp duty jack up the property price?
It dissuades people from putting property on the market, therefore limiting supply and driving up prices. Instead of dampening demand, it actually dampens supply.
'There is a sure-fire way to predict the consequences of a government social program adopted to achieve worthy ends. Find out what the well-meaning, public-interested persons who advocated its adoption expected it to accomplish. Then reverse those expectations. You will have an accurate prediction of actual results.' (Milton Friedman, Laws That Do Harm, October 25, 1982.)
If you find yourself fatally conceited, you had better be more humble.
Sometimes economic analysis is much more tricky than you originally think.
If interest rates increase and prices fall then the government will most likely cut the building target to stabilize supply. Same as in 2000. They will also remove the special stamp duties.
Prices will fall for 2 years and then stabilize for 2-3 more years. So 5 years from now they will start increasing again.
If you take in inflation and if you compare to other countries like HongCouver and UK and Dubai it is a normal cycle and nothing to be really scared about.
Historians will look back at the 1997 Fortune magazine article predicting the Death of Hong Kong as being prescient not so much for their rationale as for the end result of the handover. Beijing did not destroy Hong Kong; Hong Kong leaders did it all on their own: property out of reach of local buyers, air pollution killing 3000+ people per year, an obsession with tourism that ruined our street life, massive and unneeded infrastructure project that squandered our resources, tossing the rule of law out the window (see Henry Tang's basement) and on and on. A real shame.
Errh, That is the work of Beijing which you described. There really is no HK government nor HK leaders. It is just a big charade, Legco and Exco. The obsession of tourism, it really is more like money laundering using watches and jewelry. The guy who wrote this article, who knows who's paid him to lean bias this way. HK will be as corrupt and as opaque as Mainland in 3 years.
John Adams
As usual - a very prescient column , Mr Holland.
It would be very interesting to find out - if it's possible - who are the majority of buyers of the recent URA projects, e.g The Avenue in Johnston Road where property agents flooding the streets are often more than pedestrians.
I read somewhere that the price/ sq foot of The Avenue apartments currently being released for sale on the lowest floors (meanwhile the upper floors are still not yet built!) are over 5 x the price/ sq foot compensation paid to the original wedding card street owners whose old blocks the URA forcibly resumed.
If - as I suspect - the vast majority of the buyers of URA developments like The Avenue are mainlanders (or locals buying on behalf of mainlanders) it would be truly ironic that the original long-term inhabitants of these old districts like Wanchai and Sheung Wan have been evicted and forced out to the distant suburbs or the NT, which are the only places their miserly compensation allow them to re-buy, only to be replaced by nouveaux riche from north of the Shenzhen border.
Certainly no local home-owner in their right mind would want to buy a URA development when they can buy a flat in a neighboring older block at less than half the URA price/ sq foot.
So I can only assume that the majority of URA buyers are indeed mainland speculators.


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