I may be in a minority of one, but I was not applauding the higher-than-expected prices realised at last week's land auction. Here is why.
Until Shenzhen opened up some 25 years ago, Hong Kong had no serious contiguous rival as a manufacturing location. But activity then began to drift across the border, until quite soon the government could hardly give away its industrial sites, even with subsidies, as I remember from my time as a director of what was then the industrial estates corporation. However, Hong Kong continued to enjoy a virtual monopoly as a servicing location for China business, in that businesspeople still presumed to live in Hong Kong and locate their white-collar activities here. It made sound economic sense for the government to exploit that monopoly and to reap the spoils from resulting high prices. Housing needs of the poorer half of society were met through public schemes; otherwise, firms and householders simply had to stump up. The public, which largely escaped conventional taxation because of buoyant land revenues, was broadly content. Hong Kong flourished.
Times have changed. The commercial and residential property markets are now also subject to mainland influence. They are integrating with the mainland, and the traffic is increasingly two-way. In this situation, it is harder to predict Hong Kong prices, and harder still for the government to steer them. One might expect Hong Kong prices to be forced down, but mainland buying has already been reported as a source of upward pressure at the top end of the residential market. Whichever way it goes, Hong Kong's unique position has been eroded.
As sole supplier of land and development rights, the government can never be entirely detached from the market. But it should consider acting in the same way as would ordinary suppliers in any competitive market - by selling, within sensible parameters, as much land or permits as can be made available, subject to prices covering costs by a satisfactory margin. It should not conspire to keep prices above what would be market-clearing levels in a competitive market. Purchasers could still be obliged to use sites within a specified period, to forestall any attempts to corner the market. Prices would still fluctuate in response to perceptions of future demand, but the average level would be lower. Property development would still be profitable - and so would be taxed.
To be fair, the government has been edging in this direction, but is still too intent on setting reserve prices to produce monopoly-type profits. It makes little sense to go on behaving like a monopolist when one no longer is one. To do so may simply prove ineffective, as cross-border competition forces prices into equilibrium; or, to the extent that it does succeed in propping up prices, it will damage the economy's competitiveness more generally. Although property will always be an important sector of the economy, Hong Kong must facilitate other areas of enterprise to become engines of growth; these will usually be helped by low, not high, property values, whether for their premises or employees' housing needs. If such a change of strategy materially reduced land revenue (a larger number of deals would provide some offset to lower prices), alternative revenue sources could be tapped. Any such redistribution of the effective tax burden would be a fair price for sustaining competitiveness and jobs.
Property companies also have long had an interest in nurturing a rising market. Although their interests are not exactly coincident with those of the government, there has been sufficient overlap to make the cosy relationship a mainstay of economic policy. But this is now fostering the wrong policy. Although we are saddled with a system of government heavily dependent on input from the business lobby, it should reduce the weight accorded to property interests. It could now afford to do so, given its plans to broaden the tax base.