Reform of the Property Market
Dr Francis Ting-ming Lui, Professor of Economics and Director of the Centre for Economic Development at the Hong Kong University of Science and Technology, was the Foundation's guest speaker on 8 May 2001. This is a summary of his remarks.
The reform of the property market was a complex issue, and hard to deal with in a short speech, said Dr Lui. Nonetheless, he would try to present a framework. In considering reform of the property market one should first consider the objectives of the reform. Dr Lui saw two possible objectives.
The first objective was, making housing affordable to the population, and so contributing to Hong Kong's competitiveness. This had been the Government policy a few years ago. A second objective would be the maintenance of stable property prices, in other words, maintaining property as an effective store of value. This appeared to be the Government's current policy, following the sharp property price decline of the last couple of years. Property prices were now 40 to 50% lower than they had been in the 1997 peak, hence the paper loss was more than HK$1 trillion, a sum equivalent to Hong Kong's entire annual GDP.
Could the two objectives be achieved at the same time? They could not, said Dr Lui, because they were contradictory.
There were too many people making policy-related decisions; too little coordination between them.
Reasons for price movements
Dr Lui presented a slide showing housing prices during the second half of the 1990s. It prompted two questions, firstly, why had prices gone up so much prior to 1997; and secondly, why they had declined so much after that.
Some commentators had attributed these movements to either the linked exchange rate, or to the phenomenon of negative real interest rates. However, Dr Lui could not find theoretical justification for such attribution. Rather, he preferred to look at the workings of inflation under Hong Kong's monetary system.
Inflation resulted from the excess of money supply over GDP growth. Under Hong Kong's linked rate system, the money supply could go up only if international trade or foreign investment resulted in monetary flows into Hong Kong. Prior to 1997, money had flowed into Hong Kong because it had appeared an attractive place to invest. But the prices of Hong Kong's exports and imports had stayed more or less stable because they were tradeable goods and so could not vary much from international price levels. So you could not have high inflation in Hong Kong expressed in the prices of tradeable goods. Rather, inflation was expressed in the prices of non-tradeable goods, namely housing.
Post-1997, these factors worked in reverse. Hong Kong was perceived as less attractive than before, and so the inflow of money had reduced to a rate lower than GDP growth. This resulted in deflation, which again had to be expressed in the prices of non-tradables, namely housing, which fell faster still.
Dr Lui's second slide showed that there had been a decline in the size and quality of transactions in the housing market. This was associated with a reversal of people's expectations over housing: they were seeing it less as an investment and more as merely a place to live. Dr Lui had compared property prices in Hong Kong with those in Manhattan. Manhattan was like Hong Kong: it was a financial centre, the economy was good, it had very limited space. But Hong Kong's property prices were higher than those in Manhattan. Why? It was because Hong Kong people bought property as an investment, believing that it would always go up. However, this driving force was now changing.
Unstable policy
Mr Tung had set stable housing prices as a policy objective. But property prices in Hong Kong could not be stable. If they were stable, housing as an investment tool would weaken. Demand for housing would fall, and housing prices would decline as well. So the policy was doomed to failure unless housing prices had already fallen to the level compatible with people's sole demand for accommodation. The latter is likely to imply much lower prices than what we have now.
Yet, Dr. Lui recalled, an item relating to the 85,000 target was discussed in a meeting of the Long Term Housing Strategy Committee as late as June 2000. He was not aware of any indications that members of the Committee knew that the target was no longer in existence. And the members included an Executive Councillor, the Housing Authority Chairman, the Secretary for Housing and Lands. If these key Government officials did not know about the existence, or non-existence of a major government policy, what hope was there that anyone else could? There were too many people making policy-related decisions; too little coordination between them.
The Government confiscated a lot of land a long time ago, and has derived substantial revenue from it.
What would be the effect of the opening of Shenzhen on house prices in Hong Kong? This was a trend that could not be reversed. There would be a trend to convergence, although prices in the two cities would not become equal because location was still important: Hong Kong was a better place to live and work in many respects.
The key policy objective for the Hong Kong Government should be to improve the economy. Hong Kong needed to be a good place to make money, a place where investors would want to come. However, Hong Kong was in a transitional period. In the past, Hong Kong had been good at labour-intensive activities. These had to be given up, but Hong Kong was not yet experienced enough in the production of higher-added value goods and services.
What of the role of Government as landlord? It was the biggest propery owner in a supposedly free market economy. Dr Lui acknowledged that the Government had confiscated a lot of land a long time ago, and derived substantial revenue from it. The positive side of this confiscation was that Hong Kong's taxes were lower than they would otherwise be. The negative side was that with the Government in charge of such a large amount of resources, there would be lobbying, resulting in inefficient allocation of those resources.
There was a lot of inefficiency in the public housing sector. For example, the Government now built flats of an increasingly good standard, of quality that was a close substitute for private sector housing, many flats even with seaviews. But it should not be providing such luxury for citizens on welfare. And you could not really talk of two markets now: the private sector market was being hurt by the public sector. The Government should reduce the public sector to obtain a healthier housing market.
Recommendations
Dr Lui had some recommendations for the Government.
- The Government could not, and should not try to, manage demand. Dr Lui could not recall any attempts by the Government which had been successful in this respect.
- Whatever policy the Government decided upon, it should make it predictable and minimise uncertainty. The 85,000 flat policy was not necessarily wrong; the media had probably exaggerated the negative side of it, Dr Lui felt. But what was important was predictability.
- Generally, the Government should work on the economy. If the economy was healthy, the housing market would improve in consequence.
- The Government's model for predicting future demand for housing needed to be more sophisticated. At present a very simple model was being used, based on population growth or growth in household numbers. But many other factors were surely also important. These included personal disposable income, interest rates, the level of the Consumer Price Index, unemployment level, economic performance, changes in money supply, and so on.
- The public housing sector should be reduced to a more limited welfare role.
The above does not necessarily represent the views of the Foundation.