Wealth divide has roots in land policy
SCMP November 8 2009
Few things are more absurd than government comments on the property
market. Most of the time, officials claim they do not interfere with
it, that prices find their own level. But when prices spike, Chief
Executive Donald Tsang Yam-kuen first suggests that measures will be
forthcoming to prevent a new bubble, then subsequently promises that
the measures will not depress home prices. Meanwhile, the Monetary
Authority takes its own measures to cool the upper end of the market
by capping loans.
The reality is that the government has always been the main influence
on property prices, primarily via its land sales and land-use policies
and, to a minor degree, through its ability to influence mortgage credit.
That has long been the case but, in recent years, the control has become
even tighter with the government not merely determining the rate of
supply of new land but manipulating the price through its application
list system. The latter is a disgrace - untransparent and an invitation
Housing production is an at all-time low as a result of government
policy. This not only sustains high prices in the urban area but is
a huge barrier to further expansion of home ownership even at a time
when interest rates are at abnormally low levels.
Government policy is also strengthening the already tight grip of
the clutch of tycoons who back Tsang in return for a say in policy.
They are the ones who control much agricultural land and can time their
applications for conversion to residential use. They are also the only
ones big enough for the mega projects of the government entities involved
in flat production - the MTR Corporation and Urban Renewal Authority.
The system is exacerbating Hong Kong's already massive income distribution
problems and creating a vast class of rentiers who can live an easy
life on the income from one or two properties bought 20 years ago.
A secondary impact of government policy has been to favour the better-off
homeowners. The differential in prices per square foot between the
upper middle of the market - say, HK$12,000 per sq ft - and the bottom,
at around HK$2,750, does not just reflect location. Everywhere, the
bigger the flat the higher the per-square-foot price. Much of this
is simply due to income levels, over which the government has no control.
But the shortage of supply in the urban area is a result of years
of failure to allow conversion of industrial buildings to residential
use. Now that is being eased, but only temporarily and in a manner
that is sure to be interpreted in an arbitrary fashion.
The policy has pushed lower-middle-income earners into the New Territories,
where time and travel costs act as an impediment to value. The only
winners are the so-called indigenous villagers whose mafia makes it
a no-go area for officials supposed to be implementing land use and
environmental laws. Meanwhile, the small-house policy provides for
instant profiteering and creates a hideous semi-suburban sprawl. What
is needed is an announced plan for medium-term yearly land sales, to
break those into smallish lots to enhance competition, and preferably
to have a tender system to try to avoid the manipulation that has occurred
at public auctions in the past.
Tsang and Co would do well to spend an afternoon studying the many
examples of the damage that high property prices do to economies. As
the Japanese found out in 1990s and as Americans and Britons are learning
now, high prices are not a proof of success. They are proof of distortion,
are a huge burden on the rest of the economy and create socially divisive
More than almost anywhere, in Hong Kong the government controls land
prices at the margin. It is time its officials stopped lying about
this and accepted their responsibility for sustaining a supply of housing
to a community which still has huge numbers - not just the cage dwellers
- paying through the nose for abysmal housing.
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