Hong Kong Chief's Housing Plans Don't Fly

In an attempt to raise his low popularity rating, the new Hong Kong Chief Executive Leung Chun-ying focused his first annual policy address on the need to provide more land for housing and build more subsidized public rental housing.

He acknowledged that private sector prices are too high and that many lower income people, particularly the elderly, live in abysmal conditions in subdivided apartments and cage homes.

The issue is important because Hong Kong ranks as the most expensive city in Asia for residential property, ahead of Singapore, Tokyo, Taipei and Shanghai, and third-most expensive in the world after Monaco and London. If it is to maintain its competitiveness, as the most important regional business center in Asia outside of Japan, housing prices are a crucial issue that must be dealt with not only for expatriates but for the millions of aspiring young people who call the territory home.

However, Leung's plans for dealing with the problem mostly address medium to longer term issues. One such is an idea for massive reclamation projects to add up to 3,000 hectares of land primarily for housing. But even if these eventuate - a big if given the time frame and likelihood of strong environmental opposition to some of them - the result would be at least a decade away.

Even an increase in public housing development is unlikely to come on stream before 2018. Shorter term increases in land supply will have some impact at the margin but are unlikely to drive down prices while interest rates remain very low. It is noteworthy that an 15 percent tax recently imposed on non-resident purchases of residential property has done little more than reduce turnover. Its impact on prices has been minimal.

There are several things that Leung could have done which would have had much greater short to medium term impact but he apparently lacks the political will to take on vested interests, including those of the government itself.

In no particular order, these could include:

Doubling property rates (a tax on nominal rentable value) on empty apartments. Some 9 percent of the total housing stock and about 15 percent of the private stock is un-let as owners see them as trade investments, not sources of rent.

Ending the absurd policy of allowing male so-called indigenous people from the New Territories the right to build a small house. This policy is absorbing large quantities of land being developed at low densities. Leung acknowledges that it cannot go on forever but is too weak to take on the Heung Yee Kuk, the body which represents these feudal interests. which have a long history of ignoring building and development regulations. It is a byword for high level sleaze and many prominent members believe themselves above the law - because they have been for years.

Using land taxes to force the corporate giants which sit on large land banks, mostly in the New Territories to develop them faster rather than use them to keep supply short and prices high. The property tycoons may not much like Leung but he is unwilling to face them down. Indeed, a proposal in his address to lift some restrictions on further development in Hong Kong island's already massively over-developed Mid-Levels section appears a free gift to these interests.

Lowering the premium that developers must pay to government for developing so-called agricultural land - in fact mostly areas taken up with used car lots and container dumps. Such a move would encourage developers to aim for increasing turnover rather than margins. However it would be against the interest of government finances. Selling land at the highest possible price remains an article of faith in the bureaucracy. Leung appears unwilling to recognize that.

Leung's failing to address any of the above perhaps reflect the basic dilemma of any chief executive in Hong Kong, not least one who, having been a professional surveyor, understands the situation. That is that though high prices are an important issue for the public, the majority doe not actually want the much lower prices needed to enable those who have yet to get on the ownership ladder to do so.

About 60 percent of the population already live in their own homes and many of the 35 percent who live in public rental housing have no aspirations to own, if only because that seems too far out of reach. Indeed, much of the current clamor is for more public housing rather than cheaper private housing. Those already in the private sector ownership have no desire to see values fall, particularly if they bought recently. Negative equity was a major issue in Hong Kong after the 1998 crash and could be again.

Sky-high recent prices are partly the result of the deliberate squeeze on land supply conducted over the previous 10 years by the government. But even more significant has been abnormally low interest rates resulting from the peg to the US dollar and, to a lesser degree, capital inflow mostly from the mainland either for laundering purposes or speculation on an eventual upward revaluation of the Hong Kong dollar.

The worry must now be that if interest rates begin to rise to what were once normal levels - say 2 percent in inflation-adjusted terms - property prices in Hong Kong would fall back and, as happened in 1999, the government would reverse policy, slowing land sales and public housing projects to limit price declines. Pressure to do so would come not just from developers and negative-equity home owners but from the Monetary Authority and banks worrying about loan defaults.

The price per square meter of housing must fall in real terms if currently low housing standards prevailing for most Hong Kong people are to be raised. But the chances of achieving that in the face of the various interests lined up to support chronic shortage of space are small. Leung's address was politically necessary and probably successful in that it put housing issues first. But do not imagine that the actual dynamics of Hong Kong's residential property market have been much changed.