The answer lies in the soil


We will know from Chief Executive Donald Tsang's Policy Address next month whether he has officially decided to become a lame duck and play for time, or if he is going to boldly address some key problem areas in the final two years of his term and attempt to sort them out before passing the baton to the next CE.

The first big test will be how he deals with the property market, where prices at the luxury end have been soaring with consequential follow through effects in the mid-range market even if not yet at the lower end.

When prices rise dramatically in a short period it means foreseeable demand and foreseeable supply are seriously out of step. One or other of these situations needs to be changed before prices will stabilize.

Can anything realistic be done to squeeze demand? The answer is surely no. It would be completely unrealistic to try to ban "foreigners" (read "Mainlanders") from buying property as any such scheme would be riddled with loopholes. Moreover it would go against the grain in what is still arguably the world's most open and free economy. Raising the percentage of stamp duty on more expensive properties is simply playing gesture politics (and, incidentally, creating an ugly precedent for both salaries tax and corporate profits tax. The pass may already have been sold here, but there is no need to draw attention to the pattern).

Using the Hong Kong Monetary Authority's role as banking regulator to serve a different policy purpose, by lowering the mortgage ceiling vis a vis property value, achieves the unique feat of being both wrong in principle and useless. It is wrong in principle because the job of the HKMA is to preserve a robust banking system, not to provide a fig leaf for policy failures elsewhere, and useless because many of the purchasers are paying in full and in cash and don't need a mortgage.

All of which brings us back to the point where, in our hearts, we know we should have started. We need to increase supply.

Judging from various leaks and trial balloons, one idea being considered is to restart the Home Ownership Scheme or something similar. But direct intervention by the Government in any market is really an admission of policy failure. It would surely be much better to try to create conditions whereby the private sector could meet market demand at all levels. Luckily there is a way of doing this in an open and transparent manner and some of us are old enough to remember what it is: we should resume the practice of regular public land auctions.

It is at this point the CE will run up against two vested interests. The first group comprises our property developers who have amassed vast land banks at historic prices and are quite happy to drip feed the supply of finished flats onto the market in a way which keeps prices high and (preferably) rising. We could and should be prepared to override them in the wider interests of the community, but that would take political courage - a commodity which sometimes seems to be in even shorter supply than land itself.

If we assume for a moment that the CE can summon up the will to bite the many hands that fed his election campaign, then he must face the second group with a vested interest: existing property owners. Here the problem is much more difficult politically. Indeed it was a bodged effort in this area that did for Mr Tsang's predecessor.

Many ordinary Hong Kong people regard property purchase as a way of preserving wealth and they expect values to stay the same or rise. And there is a curious phenomenon at work here. If a man buys a flat for $3 million and its market price rises to $6 million, he feels good because he thinks he is $3 million richer (he is not, of course, because he bought a flat of a certain size in a certain location and that is precisely what he still has: that sized flat in that location). If the market price then drops to $5 million, our hero does not feel $2 million better off, he feels $1 million poorer.

Probably the best that can be aimed for is to secure a situation whereby prices stay pretty flat for a prolonged period. It will need to be handled carefully - maybe a combination of modest but regular public auctions plus the reserve list. Hopefully the smaller developers will also feel encouraged to join in. The auction element should be maintained even when the market is quiet. And non triggering of the reserve sites would help to prevent overshooting on down swings.

It will be interesting to see whether our Chief Executive decides to play safe by addressing symptoms, or boldly plucks the nettle and addresses the underlying disease.


 
Mike Rowse
email: mike@rowse.com.hk