The Culprit of High Property Price

December 13, 2010

Much has been said and written about the reasons behind the property price hike in recent years. Observers and industry professionals have cited economic growth, wealth accumulation, low interest rates, aggressive mortgage lending, skewed supply-demand curve, influx of mainland buyers and speculation activities among the main reasons. True, some of these contributed to the hike. But the one fundamental and crucial factor at work is Hong Kong government’s perversion of the land application system.

Whoever came up with the land application system for public land sales was a genius. The system resides on the mechanism that leaves land supply to market forces. It works this way. The government prepares a list of available development land in all of Hong Kong and makes it public so that interested property developers may apply for the land to be sold through government-conducted public auction on a later date. The applying developer has to name a price and make an initial deposit to substantiate his application. If the price is accepted by the government as being ‘reasonable’, the auction will be scheduled and announced. At the auction, the applicant and any other qualified developers are free to bid for the land, which will be awarded to the highest bidder. This is a fair and open way of allocating one of the most valuable resources of Hong Kong. It should have worked well if it were not perverted by the government itself.

Under normal circumstances, developers would buy land when it is available because this keeps their mills running, for without land as raw material they won’t be able to churn out flats. Developers will assess market situations and decide how much to buy and at what price. Optimistic forecast would encourage more developers to bid at aggressive price, and vice versa. In a free market like Hong Kong’s, nobody is in a better position to judge the market than the private developers who through years of experiences have fully grasped the market. But the application system did not function well, leading to a serious undersupply since 2003 and has now prompted government to introduce punitive stamp duties and tighten up mortgage lending in the wake of the substantial price growth over the last 24 months. The government has named speculators as the culprit of the runaway property price, but is it true? I think the real culprit is the government itself.

As the sole supplier of land in Hong Kong, the government has every means and capability to deflate / inflate the market. Over the years since the introduction of the application system, the government has discreetly set a high threshold for triggering the land auction, causing land supply to dwindle. The motive behind this was largely to correct the mistake that the Tung Chee-Hua administration had made in increasing housing supply, resulting in collapse of the property market for straight six years and the turning of tens of thousands of property owners into negative equity. The administration under Donald Tsang upheld a high land price policy without spelling it out. This has been demonstrated not only in the high threshold in application system but also in land lease modifications, where the government demanded very high premium, and there were therefore only very limited land released to the market. But the policy backfired, and the ensuing land supply squeeze set the stage for another rampant price hike starting 2005. Realising that they have overdone with the application system, the government reduced the threshold to 80% of their valuation of market price in 2009, and re-introduced regular land auction (without the need for application) in 2010 in an effort to encourage developers’ buying interest. But it’s already too late. Residential price in general has surged 50% since the beginning of 2009. Had the government come to correct their own mistake earlier, there wouldn’t have been the need for the new round of anti-speculation measures which invariably dampened genuine demand from long term investors and end-users.

By Koh Keng-shing