• Thu
  • Dec 18, 2014
  • Updated: 8:22pm
The View
PUBLISHED : Tuesday, 05 August, 2014, 3:15pm
UPDATED : Wednesday, 06 August, 2014, 5:05am

Key to inequality is soaring home prices

While soaring prices have widened income gaps in major economies, the real culprit for land supply shortages must be tackled: regulatory inertia

French economist Thomas Piketty's Capital in the Twenty-First Century has made him an instant celebrity in the United States, even though his work hardly caused a stir when it first appeared in France.

The release of his book in the US has coincided with a great deal of public concern over the rising inequality of income and wealth, especially its concentration among a small fraction of the population. This has incited fears about the rise of crony capitalism, inherited wealth and the formation of a 21st century aristocracy. Piketty became an instant darling of the political left.

On closer examination, however, Piketty's data can be given a totally different interpretation , with critical implications for advanced economies, such as Hong Kong, where home prices have soared.

Piketty's study consists of three parts. First, he shows empirically that the ratio of capital to income, after falling between the two world wars and during the Depression, has been rising again. This, he argues, is because the rate of return to capital is higher than the growth rate of the economy.

Second, since capital ownership is heavily concentrated among a small minority, inequalities in wealth and income will be ever rising unless checked by wars, natural disasters or taxation of capital.

Third, Piketty calls for a worldwide, coordinated approach to tax capital in all nations so as to check this capitalist tendency. He believes the growing concentration of wealth, especially hereditary wealth, will undermine democratic institutions.

A study of Piketty's data shows that by far the most important component of capital that has been rising as a share of national income over the period 1970-2010 is domestic housing capital.

Across all eight countries in his sample - Australia, Britain, Canada, France, Germany, Italy, Japan, and the US - the average increase in the ratio of housing capital to income was 186 per cent, while the average increase in the ratio of other capital to income was only 44 per cent - making housing responsible for roughly 80 per cent of the overall increase. The US had the lowest increase in the ratio of housing capital to income.

Even more striking has been the share of net capital income from housing compared with the share from all other sources.

From 1970 to 2010, the share of net capital income from housing in the eight countries increased by 3.4 per cent on average, while the share from non-housing capital decreased by 1.9 per cent on average.

Housing income thus accounts for over 100 per cent of the increase in net capital income in this period.

What is driving these results in the advanced industrialised economies? Housing capital has greatly appreciated in value as a result of rising property prices. The higher cost of housing is mainly due to higher residential land values rather than elevated construction costs for the structures.

High-density living in major metropolitan centres today accounts for the lion's share of the increase in the value of housing capital.

As housing has become relatively more expensive, both its aggregate value and its share of household expenditure have risen across countries. This is a condition the people of Hong Kong are very familiar with.

Housing prices are determined by demand and supply. Rising housing prices reflect demand growing faster than supply. But why has supply failed to respond sufficiently?

Hong Kong is again very familiar with this condition. Most people in Hong Kong blame Tung Chee-hwa and Donald Tsang Yam-kuen for slowing down development. Others see property developers lurking behind the scenes, influencing their decisions.

But is this the correct interpretation? Why are the eight countries studied by Piketty all suffering from this same condition?

The economics literature on markets with high housing costs finds that these costs are driven in large part by artificial scarcity through land use regulation.

In Hong Kong, we all know there is plenty of land. Regulation and politics have made it difficult to develop this land.

We have plenty of industrial land but no industry; plenty of agricultural land but no agriculture; and vast country parks that most people at best visit only occasionally each year.

A natural first step to address disproportionately rising housing wealth would be to re-examine the regulations to expand the housing supply.

Landlords and property developers have benefited from these regulations, and policymakers have taken the blame.

But these regulations were imported from Britain over a century ago. The real cause behind escalating housing prices everywhere is regulatory inertia.

Richard Wong Yue-chim is Philip Wong Kennedy Wong Professor in Political Economy at the University of Hong Kong


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This article is now closed to comments

Nonsense. Inequality should be attributed to the failed capitalism which induces the influx of many speculators (those mainlanders) to fiddle with the Hong Kong market.
Unfortunately, real-estate is the only way for average Asians to get rich.
Forget about innovating and creating products / services that will change this place for the better.
Most people in Hong Kong blame Tung Chee-hwa and Donald Tsang for slowing down development?
Handy. Neither of them are in the political arena anymore.
Richard Wong's essay doubtless sheds valuable light on what causes housing price escalation and points to a needed policy solution, but it does not address worsening concentration of wealth across the advanced economies. Land supply in the US seems to me to be quite abundant, yet the share of income for the top 1% household rose from 11.3% in 1979 to 20.9% in 2007, and their share of total US national wealth rise from 34.6% to 37.1% in just two years of 2007-2009.
So based on Richard Wong's contention, one would have to draw the obvious conclusion that the same "regulatory inertia" does not hit the different income/wealth segments equally. The poor, as always, fared the worst, and this is what must be addressed by our policies.
I don’t know if the author of the book mentioned that US in its go West period that land was giving away by the government. This was the most sensible move by a government that wants a fast economic development of a place. There, the ratio of housing capital to income must be the lowest.
Economists and politicians love to promote construction including building housing as a means to galvanize the many collateral trades and businesses. In housing it also becomes a means for parasitic speculation that wealth is artificially created for individual by the labor of others in paying more than a property really worth.
Hong Kong probably leads in property speculation in the world. The inequality in Hong Kong does not happen mysteriously. If limited resources with unlimited population growth plant the seed of ever rising cost in housing per unit square feet, Hong Kong’s housing market is artificially set by pulling in mainlanders despite a drop in local population below even at regenerating rate.
The housing for individual’s wealth accumulation is a bet against time in Hong Kong if economic reform can’t be had. The economy is a house of cards which will bring adverse fortune to those who are still spending and spending greatly on property.
How About
Richard, you reckon this might be applicable to the inequalities in Mumbai, San Paolo and Moscow?
yes....look at the regulatory environment in Mumbai


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