Still trapped in property delusions
October 7, 2002
The fever never abates. Hongkong's leadership still seems
to think that economic salvation lies in property prices. Now Antony
Leung is to make another market rigging effort. For whose benefit, one
The property obsession of our leaders should not of course
come as a surprise. Not only do first generation tycoons such as Li
Ka-shing owe their wealth to a quarter century of property price inflation.
Second generation ones, including Tung Chee-hwa, moved much of their
fortunes from the likes of shipping and textiles into what looked an
easier way to make money - and one where they did not have to face international
competition. Look at the list of assets of Hongkong's legislators and
one finds the same pattern of multi flat ownership. As for Mr Leung,
he made a career in retail banking, an activity now dominated by mortgage
lending rather than trade finance.
So one can understand where these people are coming from.
But what are they trying to achieve? Maybe the coming measures will
have some short term effect. The previous market props - cessation of
land sales, tax relief for home mortgage payments, cutbacks in HOS sales
etc - probably did stem the fall. However they did so at the cost of
further major deterioration in the fiscal situation, which is tolerable
only in the short term, and delay in the adjustment of the rest of the
There are only two serious arguments to be made in favour
of trying to stabilise prices at what are still at very high levels
by any standard, let alone a city whose "world class" status is being
questioned. The first - and one which does apply in Japan - is that
property price falls have been the main cause of the bad loan situation
which is at the heart of Japan economic problems.
However, there is no particular reason to believe that
Hongkong banks are anywhere near facing a similar situation. The home
price spike was relatively short lived and occurred partly because of
a shortage of new supply. It is only since the bubble deflated that
loan to valuation ratios have been raised to levels could be viewed
as potentially risky.
Given the sharp decline in interest rates since 1998,
negative equity has not led to a steep rise in distressed loans. The
only real threat to the banking industry would be if interest rates
rose sharply and homeowners were no longer able to service their loans.
Such a rise looks unlikely in the medium term. However, it is a possibility
so long as the Hongkong currency is pegged to that of the US rather
than allowed to respond to Hongkong's own domestic and trading circumstances.
It is ludicrous for the government to try on the one hand
to push up property prices while on the sticking with a currency policy
which does not permit interest rate flexibility. It is likely that were
the dollar to be floated it would move down. The peg to a strong dollar
after most of Asia ( led by China) devalued during 1995-97 is an albatross.
A 15-20% decline would make Hongkong assets cheaper for foreign investors
and thus provide a lift to values in local currency terms.
However, even if a float were not to lead to some depreciation,
interest rates at least could be cut further, which would provide some
stimulus to the economy generally and probably to asset prices. Hongkong
banks are flush with cash, savings are high, loan demand very weak.
There is every reason for cheaper money - except the peg.It is not even
certain that lower interest rates would mean a weaker currency. Thai
ones are lower than the US, yet the Baht has been quite firm.
The second argument for official attempts to prop up
real estate is that declining asset prices have fuelled a deflationary
spiral which in turn has caused a negative wealth effect. People feel
poorer so they save more and spend less. There is certainly some truth
in the negative wealth effect. But it is unquantifiable. Attempts in
other countries to track it have been only partly successful.
It is surely easy to exaggerate in Hongkong. Home owners
deep in negative equity are a noisy lot but still quite a small group
compared with the numbers who bought before 1993 or after 2000 and are
either still sitting on large unrealised profits or are near enough
to break-even not to worry too much. The majority of home owners have
been enjoying higher real incomes because of the fall in mortgage rates.
A far larger reason for lack of consumer and home buyer
confidence is the level of unemployment and general sense of job insecurity.
Instead of trying to push up land and property prices it would be better
to set our goals for housing standards rather higher than they are now.
Hongkong needs more construction not less. Lower prices should lead
to more demand. Mr Leung seems to want to stand economics on its head,
aiming to increase demand by raising prices!
The government's goal seems to be to get people back into
the habit of believing that property is the surest store of wealth and
prices always rise. This is foolish both in economic and social terms.
Firstly, people deserve better housing - which means a lower land to
construction cost ratio. Secondly, the property fixation means that
savings are shifted to asset price increases (an uneven form of wealth
re-distribution) rather than to new investment whether in new businesses
or in buildings and related infrastructure.
In Hongkong's case there are two further arguments against
a policy of trying to boost asset prices. Firstly, it probably will
not work because demographics are against it. The rate of new household
formation is continuing to fall and the only source of population growth
- migrants from the mainland - mostly lack the resources to be home
buyers. Secondly, limiting land sales to a trickle does more harm than
good to its revenue. In the short run the government badly needs land
revenue to reduce its deficit. In the longer run it needs to get away
from its over-dependence on property related revenue generally - something
it has been talking about for years but done nothing.
The problem anyway is not so much confidence in assets
as a weak economy generally. It is noteworthy that rentals have fallen
only a little more slowly than property prices even though interest
rates have plummeted. So attempts to bolster asset prices when demand
by end users is weak looks destined to fail.
It is also worth noting that government data probably
exaggerates the degree of deflation in Hongkong. The consumer price
index is heavily weighted towards private sector rentals although in
practice few people live in private rented accommodation. Most are either
home owners or live in public rental housing. Labour costs, the main
ingredient of most service industries, has been stable and import prices
have stopped declining.
The property market, like the stockmarket, is not an
end in itself. Its prosperity should be the result of demand for goods
and services throughout the economy. Any rise in asset prices should
only come well after the economy and rental demand have picked up. An
attempt to put the cart before the horse will merely delay recovery,
inhibiting the adjustment of Hongkong's service sector to the realities
of life in post-crisis Asia. ends .