Local property developers are among some of the richest people in the world. The secret of their success is that they are the only developers who know a way to inflate the saleable floor space of an apartment, sometimes by 30 per cent or more, to maximise profits.
One prominent financial opinion leader has likened their success to the art of baking, saying that Hong Kong developers have a secret recipe to ensure that, no matter how expensive the flour is, they can always generate huge profits from the sale.
Using the baking analogy, the cost of the flour is the cost of the land, and if we add construction costs plus a reasonable level of profit, we would come up with the cost of a loaf of bread, which would be the property price. But, because developers often unfairly inflate the saleable size of the flat, they can push the price up to exceed market prices even before other necessary costs come into the equation.
In this way, their secret recipe bolsters their confidence to make a profit, no matter the cost of the land. Just this week, a piece of land in Kowloon set a record price of HK$16,587 per square foot.
In theory, property prices are dictated by supply and demand, the economic situation, as well as purchasing power and affordability. But, in reality, our powerful property developers are in full control. In order to artificially inflate prices, all they need to do is calibrate and control the supply, and use opaque sales tactics.
They also benefit from other favourable market conditions such as the free flow of capital from the mainland with virtually no government restrictions, and a sustained period of low interest rates allowing a strong inflow of foreign capital.
The government's introduction of a series of measures aimed at stabilising the property market in 2002 inadvertently made things worse. As a result, the supply of land decreased, thus creating the perception of a housing shortage. Again, it benefited property developers, allowing them to carry on with business as usual, reaping massive profits.