The high prices paid at this week's land auction are a reflection of the growing confidence that, whatever the present political and economic uncertainties, the fundamentals underlying Hong Kong's success will remain strong long beyond next year's transfer of sovereignty.
The big developers who competed so aggressively for sites in Tai Po and Shek O know they cannot expect to realise any return on their investments for at least three years, since it will take that long to redevelop these now vacant plots. That means the bidders could safely discount the present signs of nervousness in the property market that were recently reflected in Hang Seng Bank's scaling down of its growth forecast for this year.
In the run-up to the handover, such jitters are probably inevitable. But, in the long-term, there is only one direction in which the property market can go. Even the most elementary application of demand and supply theory shows flat prices are almost bound to continue their upwards spiral. The supply of land is becoming increasingly tight, with much of the New Territories already developed, while Chinese and community opposition is likely to slow, if not stop, further harbour reclamation. But demand will continue to rise. Population growth is one factor, with 8.1 million inhabitants predicted by 2011, according to the recent territorial development strategy review.
Demand for flats will grow even faster, since increasing affluence and the erosion of traditional family ties means many more are moving into their own homes. Already the number of households is rising much faster than the population.
The additional pressure from wealthy mainland investors flooding into the territory after the handover has led to predictions that residential prices will double over the next three years. That may seem far-fetched given the currently volatile state of the market.
But it is the big developers who have most at stake, and they have demonstrated they are willing to risk hundreds of millions of dollars to prove such predictions correct. Henderson Land's $535 million bid for the Tai Po lot, and Sino Land's purchase of the smaller Shek O site, represent a massive vote of confidence in the long-term future.
