Weaning the state from the property market
The Hunghom flats saga has, if nothing else, revealed a broad coalition favouring government disengagement from the property market. But that is easier said than done. As well as being necessarily involved in planning decisions, the government is the sole vendor of new land and redevelopment rights. And most people are probably tolerant of that monopoly, given that the alternative might be the emergence of private monopolies which, on evidence to date, the government is neither very keen to regulate nor particularly adept at doing so.
Meanwhile, HSBC chief David Eldon has been calling for caution in what now appears to be a rising market. Some hope! People never learn. And, as Jake van der Kamp noted last week, the banks are complicit in funding the market. The best we can hope is that, under the watchful eye of the Monetary Authority, banks remain wise enough not to endanger depositors' money in the same way as past flat buyers have dissipated their own savings.
But I share Mr Eldon's underlying concern. Now that home ownership has become more widely affordable, and business premises costs have come crashing down, the last thing Hong Kong needs is soaring property prices again. Some recovery from the trough may be in order, as a more rational balance is restored between supply and demand, but ideally that is as far as it should go.
The government could help keep prices down by supplying land more aggressively. Why not auction off the maximum amount of land and redevelopment rights that can be made available, at any price which covers costs, and cease all targeted dependency on land premium as a source of revenue? Think of all the redundant buildings which could be released for redevelopment if the government no longer insisted on premium payments. Developers would still need to be obliged to develop plots once acquired, in order to prevent them cornering the market. And, if necessary, a new tax on development gains could be levied at completion, so that the government would benefit from any fortuitous rise in prices, but - importantly -without it having fuelled that increase from the outset by trying to maximise premium income.
Such an approach would be no guarantee against future price rises or volatility, but prices would, on average, be lower than under the present system. The advantage of cheap land is clear. The disadvantage, apart from the squeals of protest from developers with existing land banks, is the prospective loss of revenue. Based on figures for the 12 years to 2002-03, land premiums contributed 11 per cent of total government revenue, equivalent to about 2 per cent of gross domestic product.
Suppose, arbitrarily, that, under a new regime, only one half of that survives - the proceeds of auctions, plus the possible development profits levy. Roughly, the shortfall could be covered by a goods and services tax of 4 per cent applied, conservatively, to about one-third of typical resident consumer spending items, plus most of tourist spending, or by an increase of about 2 per cent in the rates of salaries and profits taxes. These are by no means trivial numbers, but a policy of, in effect, expanding the supply of usable land and lowering its price might bring a better balance to the economy as a whole. At the very least, the economic arguments deserve further study.
The proposal would also produce benefits from, first - in budgetary terms - ditching a volatile and unpredictable revenue source in favour of more stable ones; second, from sparing the financial secretary the conflict of interest inherent in the present set-up where a key revenue source is also an engine of inflation; and third, from loosening what many see as unhealthily close ties between government and developers.
Regrettably, however, given the precarious state of the budget, the government is likely, for the foreseeable future, to continue to try to maximise land revenues. Then, as property prices surge and the public coffers fill up, we will hear once again the complaints about unaffordable housing, and about exorbitant rents driving business elsewhere. History, after all, has a habit of repeating itself.
Tony Latter is a visiting professor at the University of Hong Kong
