Even as property stocks slide, the buy recommendations keep coming. More supply means more profits, not tumbling prices and lower margins runs the refrain. Investors are not listening. Even with no change in interest rates, worries that the new administration is serious about increasing housing supply is fuelling the post handover stock market blues. Uncertainty prevails with only outline details of the 10-year programme ensuring 85,000 new units released annually and a give-away of public housing. It remains to be seen if urban renewal schemes will have a meaningful impact. As anyone who has ever wandered New Territories backwaters or derelict urban areas knows, Hong Kong has plenty of land. Unused factories, the West Kowloon reclamation and Kai Tak airport all have huge development potential. While largely unsaid, underlying many analysts upbeat assertions is a crude real politic running that a government so dependent on land sale and conversion payments will not undermine its tax base. Yet, assuming best socio-political intentions the question must be, what chance is their of success within the time objective? Why not, after all, simply flog off much of that land scheduled for rezoning years down the track. Even if bureaucratic inertia can be overcome, trouble lies in Hong Kong's over-stretched transport links. With so much of the population travelling north-to-south every day, many sites simply cannot take expansion. Areas like Tseung Kwan O will not see its Mass Transit Railway extension completed for another six years, similarly inadequate road access on the West Kowloon reclamation will hinder high density development. According to SocGen-Crosby, planning and transport problems mean large-scale building on developable land cannot be entertained until at least 2002. The failure to judge population growth in the early 1990s has meant the means for moving lots more people on the early morning commute is not there. Supply side solutions are always a long time coming. In the short term the government must be hoping to rein in expectations. Just as monetary growth targets are used to give consumers and firms an idea of inflation years ahead, it is hoped that a planned approach to new supply similarly realigns speculators' views of the future. Expect much hot air along the lines of hitting speculators where it hurts when the new measures finally are announced. Recent years have seen huge variations in the number of units hitting the market. The result has been huge price volatility. As this column has oft repeated, speculators are not the cause of market instability but the effect. Only when an equilibrium of supply and demand is achieved will prices stabilise. So long as real interest rates remain low and wage growth remains positive they will keep rising. Indeed if the government can tame price volatility it will consider the job half done. The trouble for developers is that price volatility is essential to their profit machine. Violent movements across a typical two-year cycle allow them to sell flats at the top and negotiate land conversion premiums at the bottom. Therefore Hong Kong property developers have some of the highest profit margins in the world. By selectively releasing flats into a bullish market, speculators tap popular demand, triggering the price spirals that earn such political ire. During this phase most sales are booked. Later, when prices inevitably tumble, attention turns to negotiating land premiums with the government. Since this represents the difference between land in existing use value and that after development, the developers benefit handsomely from frequent corrections. Nava Securities argues that under stable price conditions developers can earn only marginal returns rather than the 60 per cent plus when deeply volatile. If so, it may be premature to call a recovery in property stocks.