Homebuyers not stopping amid property madness in the city

Hong Kong investors find the escalating trade war between the United States and Chinese mainland tame when compared with the property market madness.

Despite repeated warnings from the government and economists about a possible disruption to economic growth and rising interest rates, homebuyers still flock, cash in hand — mostly borrowed from banks and money lenders — to snap up whatever homes developers have to offer.

Banks are only too happy to oblige when the liquidity pool is overflowing with the flood of overseas capital in the past several years. The net outflow in recent months has been too small to make much of a difference while lending rates have been kept unchanged despite six increases in the United States since early 2016.

A unit of about 150 square feet (14 square meters) in a low-cost housing estate made headlines last week when it was reportedly sold for a record HK$3.2 million, or HK$21,333 per square foot. Indeed, tiny apartments in the least affluent neighborhoods are in the strongest demand because fewer and fewer potential homebuyers can afford anything better after the median home price has shot straight up for 26 consecutive months.

If you think that it’s too much to pay for a home in Hong Kong, you’re in the minority. Even at current prices, the demand is so strong that developers find it an opportunity to continue raising prices of newly completed apartments without having to worry about slowing down sales.

Under such circumstances, all government efforts to cool the property market have produced little, if any, results. The proposed tax on vacant apartments to discourage developers from profiteering by manipulating supply has been vehemently denounced by property developers as being unfair to them. Judging by apartment sales in some newly completed projects, they really have little to worry about.

Is there really nothing anyone can do to dampen the rise in property prices that has become a major source of public discontent?

To find the answer, it is necessary to trace the root cause of the dilemma all the way to the “traditional” government housing policy. In the 1970s, the government came to realize it could easily fund the cost of building much-needed infrastructure facilities to turn Hong Kong into a service center by selling so-called crown land, that covered a large part of the city, to private developers instead of raising taxes.

The scheme worked exceedingly well. Initially, all proceeds from land sales at public auctions were classified as non-recurrent income and used exclusively to finance non-recurrent expenditure on infrastructure projects. The line was blurred in subsequent years. Now, land-sale income is accounted as recurrent and is partly used to finance a range of recurrent expenditures on social welfare, healthcare and education.

The government housing policy was focused almost exclusively on building subsidized homes in large housing estates outside the city perimeters for rent to hundreds of thousands of needy families at below market rates. Unlike Singapore, homeownership was never a priority in the Hong Kong government’s housing policy.

When home prices began to surge in 2015 to such levels that even middle-income groups found it hard to afford, the government’s initial reaction was to increase the supply of land for sale to developers. But the resulting increase in the supply of apartments failed to drive down prices, which have continued to rise.

This has brought the government around to the view that its old housing policy can no longer serve the needs and demands of the people in this fast-changing social and economic environment. The gist of a newly formulated housing policy shifting the emphasis to homeownership was first made public in last year’s policy speech by Chief Executive Carrie Lam Cheng Yuet-ngor.

The government followed that up late last month by announcing an ambitious plan to build “affordable” homes for sale to specific segments of the public at substantial discounts to market prices.

The public have apparently yet to fully appreciate the significance of the new policy. But anyone who is itching to pay developers an exorbitant price to buy a “nano” apartment at this time should spare a thought at least to the government’s new housing plan.