To fight income inequality in Hong Kong, take on the property development cartel
Philip Bowring says that the problem of Hong Kong’s income inequality can’t be solved without taking on development cartels and addressing runaway home prices, and suggests raising rates and phasing out interest relief
Budget time is coming and it’s an occasion to look at the nexus between home prices, tax policy and income maldistribution in Hong Kong. Usually, these are deemed separate issues and dealt with in the piecemeal fashion of a bureaucrat-led government.
The first two issues contribute massively to the third, however. Therefore, the first step must be to ensure that policy does not make things worse. That well-known promoter of populist causes, Sun Hung Kai Properties, suggests that to help new homeowners, the government through the Hong Kong Mortgage Corporation ease down payments for first-time buyers. Isn’t that nice? Well, yes if you want more money chasing the same amount of property. Pour in more fuel when money is cheaper than ever, repayment periods close to all-time highs and tax policy promotes mortgage debt.
Cheap money is already the single most important cause of the asset bubbles affecting real estate in many cities, and stock prices globally, and with our US dollar peg, Hong Kong cannot escape. But our problem is that the primary local actors – the government and big developers – thrive on asset inflation. Both have a long history of restricting land supply to promote that. All the talk of the difficulties of increasing land supply is little more than a lame excuse.
Financial secretaries live in dread of property price falls because they are bad, not for the economy, but for their budgets, in the form of land revenue, profits tax and stamp duty. For 15 years, they could let asset inflation do their work for them, avoiding the challenge of broadening revenue. Instead, they have undermined their tax base and fuelled asset prices through mortgage and other tax relief, benefiting the upper 20 per cent of earners.
Explaining Hong Kong’s housing crisis
One horrendous result we now see is the ever-widening gap between public and private housing costs, and hence pressure on the government to widen the social gap further by building more public housing out of money raised from exorbitant land prices! They should instead challenge the developer cartel and launch a massive programme of home ownership projects.
Meanwhile, at present there is no evidence of a strategy for dealing with a fiscal future, should there be no more asset inflation to bail out the government. One-off sweeteners to reduce embarrassing surpluses do not constitute a strategy.
Even without tackling the vested interests of the developers and New Territories bosses, the government should be planning for a 25 per cent or more fall in prices over, say, three years, if increased supply and high interest rates combine. It can also commit to raising property rates to compensate for revenue losses. Rates are a much more reliable and broad-based income source. The shift would also reverse some of the generational imbalance resulting from asset inflation: young would-be owners face ludicrous prices for tiny flats while those who bought back in the 1975-95 era sit on huge unrealised wealth and enjoy space many no longer need.
Government can remove another distortion it created by phasing out mortgage and other interest relief. This can be compensated by reducing all tax rates to a flat 10-11 per cent. Likewise, it should axe other tax breaks such as accelerated depreciation in favour of lower, simpler taxes. Tax breaks for children, dependents, and so on should be replaced by direct payments to all regardless of income. The myriad concessions and subsidies introduced in recent years are beloved by bureaucrats but distort the economy and increase income gaps.
Next, government can increase recurrent revenue by taxing a few aspects of domestic consumption. There is no need for a general sales or value-added tax. A 30 per cent tax on power consumption would be one simple way of raising revenue, and one falling mostly on the big commercial users and those with large flats. It would also help cut air and light pollution. For the lowest income groups, compensation may come through increased welfare payments and a minimum-wage increase. Much higher prices for water are also in order and would fall mostly on higher-income groups. To support health and old age welfare, it should transfer 50 per cent of capital revenue to general revenue and stop wasting it on uneconomic projects.
Next it should remove the massive subsidies provided to the relatively rich owners of the private cars clogging up the streets of the urban areas and making life miserable for the 90 per cent using public transport. As the government remains reluctant to go for road pricing, first proposed 30 years ago, it can start with large increases in tunnel tolls, particularly the Central one, which should be HK$60 to keep up with inflation. City centre parking charges are tiny compared with downtown London, Tokyo, Sydney and other cities. Free office parking – as enjoyed by hundreds of civil servants – should be taxable.
It was famously said by a mayor of Bogota: “A developed country is not a place where the poor have cars. It is where the rich use public transport.” Let that be a motto for a Hong Kong which sets out to reverse its wealth and status divides with simple land and tax reforms, which would enhance its free-enterprise, low-tax appeal.
Philip Bowring is a Hong Kong-based journalist and commentator