Numbers Talk

February 7, 2012

Recently, government officials have been rejoicing over the decline of property prices in the last six months, attributing the market softening to a series of clampdown measures against property speculation which they put in place in late 2010. These measures include, among other things, the introduction of a Special Stamp Duty (up to 15 per cent additional stamp duty levy if the property is resold within two years of purchase) and the lowering of mortgage ceilings by 10 percentage points (which means for luxury properties the loan to value ratio is 50 per cent).

Figures released by the Land Registry last week showed the total sales of residential units in January was 3,507, comprising 802 primary transactions and 2,705 secondary transactions – the latter was even lower than during Sars in 2003 (2,977) and the financial turmoil in late 2008 (3,287).

On the back of hugely reduced activities, price declines have been recorded to the tune of 10 to 15 per cent. In the luxury property segment, sellers have lowered asking price by 10 per cent generally, and in some cases, 20 per cent. The mortgage ceiling of 70 per cent loan-to-value ratio may have helped in avoiding negative equity so far, but the quality of collaterals has definitely worsened.

The government measures, together with the prevailing pessimism stemming from economic uncertainties, have dampened market demand. Users have postponed purchase plans and investors have left the dealing scene. However, the lull does not spell the extinguishing of demand; it is merely putting a lid on it. History has shown time and again that this pent-up demand, when eventually released, will create even bigger bubble because of the time lag between demand and supply, and will result in tumultuous fluctuations.

Despite industry calls for relaxation of the dampening amid severely twisted supply-demand balance, government officials have stressed their determination to continue with current measures.

The truth is that they should have no reason for rejoicing. If the current decline of residential prices in the region of 10 to 15 per cent is not enough, then how much is enough? Who is to make this judgment call? The officials? Obviously they are the worst bunch to judge, as history can tell. Still remember when the Tung Chee-hwa administration tried in vain to steer the market and resulted in catastrophic market slump of 70 per cent, condemning tens of thousands of families into negative equity? The dampening measures taken by Tung coincided with economic recession, which added gravity to the collapse.

And now economic outlook is bleak, and this largely stems from Euro crisis and a weak US economy on which we have no control or influence. It is the general consensus that the effects of the Euro crisis are far-reaching and will have a long term impact on the world economy. China’s economic growth, on which Hong Kong relies, is decelerating because of external environment.

It is definitely not the time to rejoice at the prospect of further market declines. Shouldn’t we leave it to the market to decide? It’s time to put a stop to dampening policies. A free and mature market in Hong Kong is best left to itself to adjust to environmental changes, as various forces at play will naturally produce equilibrium. Government interventions will only serve to distort the market and twist an otherwise achievable supply and demand balance. It is déjà vu again – an already battered property market and policy makers oblivious to current market woes and the potential risk that is looming large.

By Koh Keng-shing