(This essay was published in South China Morning Post on 11 March 2015.)
Hong Kong recently introduced another package of measures to suppress demand in a bid to curb property prices. It is difficult to be optimistic about their effectiveness.
With the exception of the years following the Asian Financial Crisis, property prices have risen steadily. This is a global phenomenon. Demand has outstripped supply in all major international economic cities since 1980, when the world’s economy started to become far more integrated.
Hong Kong’s rising property prices have also been further fuelled by China’s opening since 1980.
Over the decades, the government has introduced increasingly tougher measures to suppress demand by imposing punitive stamp duties, increasing down payments on mortgage loans, and curbing confirmor transactions. Yet property prices have continued to rise.
The question is, why doesn’t government focus efforts on increasing supply? I can think of several possible explanations, some more plausible than others.
First, it has long been alleged the Hong Kong government has a high land price policy in order to maximize revenues. This is a mistaken popular view, yet it has persisted since colonial days.
A much better approach to maximize revenues would be to adopt a broad-based tax regime with a low tax rate to promote economic growth. But this is not the tax regime that Hong Kong has in place.
It also seems very odd for government to adopt a high land price policy to maximize revenue, while at the same time operating a public rental-housing program and a subsidized homeownership scheme.
Second, government policy horizons are said to be too shortsighted to make it worth their while to increase housing supply, based on political considerations. This notion is derived from the “borrowed time borrowed place” mindset of the British colonial government, at least before Murray MacLehose became governor.
But since the mid-1980s, our society has become more open and politically accountable. This has made the consensus building process required for approving development projects increasingly difficult, resulting in long delays, limited supply, and higher property prices. In other words, the transaction cost of development has become significantly higher. By the mid-1990s, this had added 70 percent to property prices. Higher transaction costs are now a permanent feature of our development process.
Who benefits from a more open and therefore more costly consultation process that delays development? The answer is simple: those with property.
In 2001, 50.8% of households in Hong Kong were owner-occupiers, a figure that has grown little since. If looked at purely economically, limited supply and rising property prices make it easier for existing property owners to acquire new properties because they are more able to finance the high down payment. Those without property find it more difficult to enter the market.
A political economy analysis would suggest that a coalition of existing property owners would, out of self-interest, vote in favor of limiting housing supply.
This would be difficult to do openly but could be achieved indirectly by backing environmental and conservation causes that preserve country parks and heritage structures, and adopt expensive building standards.
Cumbersome public consultation processes can also delay developments in the name of openness and accountability. Developers dread these processes and seldom favor slower development because their profits depend directly on more development.
One alternative, privatizing public rental housing, should be highly popular as it would, in one fell stroke, turn over 30 percent of voters into homeowners. But there is a very vocal minority that argues this would provide “double benefits” for tenants. This is a concocted argument. Why not call the original benefit a “half-baked” one?
There are also those whose livelihoods depend on a constituency anchored among public housing tenants. These tenants share a common collective interest. They invariably stay in the same premises they were initially assigned and form a natural voter base for those seeking to develop a career in politics. Then there is the bureau whose employees depend on the continuation of the public rental program for their careers.
Misguided housing policies are nothing new. In 1947, the British colonial government passed a rent control ordinance just as the huge influx of immigrants from the Mainland was arriving. The intention was to protect existing tenants in old tenement units, but these tenants ended up profiting by subletting their units to new immigrants. Landlords did not benefit at all. Obviously, existing tenants were the dominant political influence at that time.
Politics makes strange bedfellows indeed.
