Debate rages on whether scheduled supply will be able to meet demand The government's latest land sales plan has sparked fierce debate over whether Hong Kong is heading for a shortfall of new homes. The discussion focuses on whether the government's newly scheduled sale of residential land, which could accommodate 11,000 flats, together with the supply from the two rail companies and the Urban Renewal Authority (URA), will meet the demand for homes over the next few years. Property agents said the schedule, announced last week, was unlikely to meet annual demand of 26,000 to 30,000 units a year, and the shortfall could lead to a sharp rise in prices. But analysts and academics said that, even though the number of new flats to completed in 2006, 2007 and 2008 would fall, the market was unlikely to suffer a sudden shortfall. This was because developers, which were allowed to sell properties 20 months ahead of completion, would pre-sell units if there was sufficient demand. 'One point of debate is on the demand side,' said Morgan Stanley analyst Kenny Tse Chiu-ping. 'Some expect the figures will reach 30,000 units a year. But I expect weaker demand for housing because of the structural economic weaknesses in Hong Kong.' The other point of contention is when these flats will be completed. The government last week announced the sale of the 29 residential sites and six commercial sites in the 2005 fiscal year, which analysts estimated could be worth $65 billion. The residential sites, with a total area of 22.1 hectares, could accommodate 11,000 flats. Director of Lands Patrick Lau Lai-chiu said 22,000 flats could be produced from this year's property project tendering by MTR Corp, Kowloon-Canton Railway Corp and the URA. All these flats would be completed as early as 2007. But Centaline Property Agency senior research manager Wong Leung-sing said these flats would be completed in 2008 and 2009. He predicted that only 12,600 units would be completed in 2007. Henderson Land Development general manager Tony Tse Wai-chuen said the increase in potential supply on the application list might not translate into actual supply. Last year, only five residential sites and one commercial lot were sold out of 17 put on the application list as developers' bids failed to meet the government's target. Under the application list system, a site will be put up for auction only after a developer undertakes to bid a minimum reserve price set by the government. Eddie Hui Chi-man, associate professor at Hong Kong Polytechnic University's department of building and real estate, said it was very unlikely the market would see a supply shortfall. 'We have not taken into account the flats to be produced from developers converting agricultural land into residential lots,' said Mr Hui. Rural land converted to residential use could yield about 10,000 flats a year if developers are aggressive in making use of the land. There are also 2,000 government-subsidised homes being turned into private homes that will be put on the market by 2007. He said developers' calls for an increase in land supply were part of their strategy to talk up market sentiment. JP Morgan analyst Raymond Ngai Chi-hung said: 'There is a shortfall if we look at the number of completions. However, developers will pre-sell their units to narrow the market gap.' Taking into account more than 10,000 completed but unsold flats, the market was unlikely to see a shortfall, he said. Mr Tse of Morgan Stanley forecast that the annual average supply for sale would be 22,000 flats up to 2008 - 18 per cent below the take-up rate in recent years. Because of that, he did not expect a drastic shortfall but foresaw tight supply. Mr Tse said demand would decline to about 20,000 a year as it had generally been tailing off since the 1990s. He said tight supply in the longer term could extend the duration of the current residential cycle. Instead of focusing on the potential supply shortfall, Bank of East Asia chief economist Paul Tang Sai-on said the market should focus on whether the government had adopted a policy to regulate the market.