Fixed assets

Chief Executive Tung Chee-hwa's off-the-cuff remarks on the need to push flat prices higher is arguably the most significant official pronouncement on property matters in the past five years. The substance of the policy shift is unclear, but the intent is obvious.

Mr Tung came to office believing Hong Kong's key economic problem was a 'bubble economy' driven by sky-high property prices. What followed was a bungled attempt at a managed deflation using rigid supply targets and expanded subsidised homes-for-sale schemes. His apparent recantation on Tuesday night lacked presentation prowess or basic clarity. Financial Secretary Antony Leung Kam-chung's comments on Wednesday confirmed the government's alarm at the gathering price war among developers and suggested policy is again being made on the run. The market is abuzz with unspecified counter-measures to check the decline: topping the list is another suspension of the Home Ownership Scheme, a further suspension of land sales and stamp duty tax reductions.

This is unfortunate, as the last thing Hong Kong needs is another property patch-up job. At the most basic level, Mr Tung and Mr Leung's comments on the need to stop price falls reveal a misunderstanding about the role of government in regulating the sector. It has no place offering a view on the proper level of prices. Those depend on a myriad factors outside its control, such as external economic demand, interest rates, demographics, general planning policy and, most importantly, personal preferences for property ownership.

People buy a flat to put a roof over their head but also as a long-term store of value. When the government indicates it plans to manage that asset's value, the kind of collapse in confidence seen over the past five years is inevitable.

Nobody knows whether the market has hit bottom. What can be said with certainty is that prices have not been so 'affordable' since the 1980s: buying is cheap compared to the cost of renting. Going forward, new supply is light compared to household formation trends. Savings are abundant and despite a harsh downturn the majority of the population has sound personal finances, translating into a still-healthy banking system. Under such circumstances it is reasonable to assume prices will eventually rise. What is lacking is certainty in government policy, allowing individuals to make reasoned choices about the biggest investment choice of their life.

Since Mr Tung's 1997 house-targeting pledges, civil servants have scrambled to fulfil his promises while managing a harsh economic downturn. He must now formally jettison that political baggage and outline a clear new set of principles.