Split investor, dweller demand to solve crisis

Aggressive buying by property investors is crowding out those who simply seek a home of their own, Paul Yeung notes

The housing problem is undoubtedly one of the thorniest issues Hong Kong faces. Chief Executive Carrie Lam Cheng Yuet-Ngor has rightly made affordable housing a top priority in her administration but home price rises have yet to slow down as expected. This is simply because the shortage hasn’t eased a bit despite the special administrative region government working hard on the supply side by augmenting land supply for housing. It is time to think through the housing problem and ensure the efforts are put more wisely in the right places.

Financial Secretary Paul Chan Mo-po told a Legislative Council meeting on Monday that Hong Kong home prices have largely exceeded ordinary people’s affordability. As another attempt to curb price rises, the relevant government departments have been studying measures such as imposing a habitation vacancy tax on developers’ unsold stock, and will announce the measures soon. Chan said about 9,000 new flats remained unsold between last December and March, a significant figure compared with the government’s goal of adding 18,000 new flats to the housing market every year. In response to doubts over the cost shift, the financial secretary said the tax would apply only to developers and would not affect owners in the secondary property market. This seems to be positive news as any measure on increasing supply is welcome.

Let’s take a look at some figures. In its latest report, the Rating and Valuation Department said its key price index increased 13.9 percent in April from the same month last year. Worse, residential property inflation has lasted 25 consecutive months. More specifically, medium- and smallsized homes, which are less than 753 square feet in floor area, contributed most to the price growth. There is a significant implication in this figure. What’s notable is that demand remains strong despite skyrocketing prices. According to data from realtor Midland, insatiable demand has driven prices higher and higher, with the city’s average home price rising 12 percent in the first five months of this year to HK$14.5 million.

Theoretically, increasing land supply is the fundamental way to lower property prices. But in reality, the new supply is simply too small to meet the strong demand. Confronted by the harsh housing reality and expected future challenges, the need for the city to massively augment its land supply — not only for housing use but also for economic and social development — is growing fast. The government is well aware of this reality. The Development Bureau and Planning Department admitted the currently predicted shortfall of 1,200 hectares was just the baseline estimate and had not taken into account some other factors, including new policies still under study. The Task Force on Land Supply, a government-appointed committee, also confirmed that the government’s planning departments had underestimated the land shortage as they did not take into account the demand for additional health facilities for the city’s aging population and people’s desire for bigger flats to improve quality of life. Many parties have put effort into developing further land but progress on increasing land and housing supply is constrained by political bickering and labor shortages.

It is now time to pay more attention to the demand side and adopt a twopronged approach to cope with the problem posed by strong demand. For private housing, demand arises from both accommodation and investment needs. Rising home prices have stoked investment demand, which competes fiercely with accommodation demand and threatens to squeeze the latter out of the market. The right thing for the government to do is to build two separate housing markets — each catering to one kind of need in the same way as Singapore has done with its housing markets. The government should not meddle with investment demand as any intervention into the investment market would involve moral risks. Hong Kong’s home purchase affordability index, which measures the homebuyer’s monthly mortgage payment over household income, rose to 71 percent in the first quarter of this year. That was much higher than the 20-year average of 44 percent and the worst since the city’s previous housing bubble burst in 1997. Any attempt to encourage people to buy into the private market is politically risky nowadays.

Sociologist Matthew Desmond warned us: “The high cost of housing is crushing poor families and sending them to a state of desperation.” It is time for the government to consider how to make wise use of the new supply. Last month, the governmentappointed Task Force on Land Supply kicked off a public consultation on 18 options aiming to generate 1,200 hectares of land for development, including housing use, in the next three decades. The government should make use of the new supply to provide more public rental housing or subsidized housing for sale. With a greater emphasis on increasing public housing supply and building two separate markets, the accommodation needs can be more readily met and those who have accommodation needs are less likely to be squeezed out by investment demand.