HONG KONG: Many people are interested to know whether housing prices in Hong Kong will fall sharply due to the recent protests.
Likely, the answer is no.
HONG KONG HOUSING PRICES HAVE SEEN WORSE
The Centa-City Index (CCI), a property price index typically used to track monthly secondary private residential property prices in Hong Kong, has a base value of 100 points fixed at July 1997 prices.
In August 2018, it reached its peak of 185.31. Since then, however, it has fallen by 5 per cent to 176.07 points in September this year due to poor economic conditions brought about by the protests.
However, this fall is not as steep compared to past shocks that brought the index down.
The CCI dropped by nearly 10 per cent from September 2018 to this January, owing mostly to a slowdown in mainland Chinese purchases given fresh currency controls imposed by Beijing.
It also fell nearly 20 per cent in 2008 during the global financial crisis and by 20 per cent in June 2003, from a year ago, as Hong Kong was hit by SARS disease which claimed 286 lives.
At present, however, the economic fundamentals in terms of employment and growth are still better than in 2008.
Hence, an adjustment of 10 to 15 per cent in housing prices downwards is possible, but it is unlikely to see a sharp decrease.
HIGH LAND VALUE
There are four key reasons behind the resilient housing prices in Hong Kong.
For one, with its reputation as business centre, Hong Kong’s land is valued highly. If we look at two recent international rankings with data collected before the protests, Hong Kong ranked third in the World Economic Forum’s Global Competitiveness Report 2019 and fourth in the World Bank’s Doing Business 2019 report.
Hong Kong has been a very good place for doing business and it is reasonable to expect that the city with one of the highest land prices in the world will hold firm.
Despite the current unrest, there are little signs that business are going to uproot and leave.
Second, the amount of cash in the banking system relative to the total value of the housing stock also suggests that there is enough capital in the system to mop up excess supply without the need to borrow, when the price is right.
READ: Commentary: Did aggressive land bidding by Chinese developers push up Singapore property prices?
Housing policy changes, including higher mortgage caps, and a lower interest rate environment may also contribute to more resilient demand.
LIMITED LAND SUPPLY
A limited supply of land is a third reason.
Why is the supply of land in Hong Kong so limited? According to data provided by the Task Force on Land Supply, “out of the 1,111 sq m of land in Hong Kong, 24.3 per cent is built-up area, with the remaining 75.7 per cent (841sq km) designated not-for-development or non-built-up area consisting mainly of country parks, wetland, reservoirs, fishponds, etc.
Housing in Hong Kong only occupies 6.9 per cent of the total land area.
The government can increase the supply of land but it faces severe opposition to converting the country’s parks into residential development or to reclaim land. There is also the small matter of whether it has the incentive to do so.
LARGE SOURCE OF GOVERNMENT REVENUE
Which leads me to this fourth point. Land-related items account for more than a third of the total government revenue. In the 2017 to 2018 fiscal year, the government earned 26.6 per cent of its total revenue from land premiums and a further 15.4 per cent from stamp duties collected.
The short supply of land actually helps to keep property prices high and, in turn, adds handsomely to government revenue. So, if the government were to suddenly increase the supply of land, its revenue would be affected.
Adding to the government’s reluctance to increase land supply is that land premium or sales is itself an uncertain source of income.
An economic downturn could see land prices drop. So the government has to ensure that the increase in demand from developers makes up for any drop in land price.
On the contrary, when the economy is booming, a drop in demand from property developers may offset any gain in price. In such circumstances, the government may be less inclined to create more downside pressure on its land-related revenue by increasing supply.
Despite the obvious benefits to the government of having high property prices, clearly it will have to balance this with ensuring affordable and available housing for its people. It is then inevitable that the government looks at increasing supply where possible.
As such, reforms are needed to regulatory processes and laws to make it easier for the government to convert undeveloped or semi-developed land, as well land used for other purposes, for residential use.
For instance, property developers in Hong Kong who purchase farmlands redesignated for residential use, sometimes have to wait as long as 10 years to negotiate the terms and complete the transaction before they can start work on it.
Measures that lower costs of development, owing to a faster and more streamlined process of acquiring the land, could see the developers passing on cost savings to consumers through lower prices.
In addition, since land supply is a large determinant of government revenue, the government should have a moral obligation to reduce its dependence on it so that it does not compromise its ability to offer housing as a key public service.
In fact, the Hong Kong government knows that it relies too much on revenue from land related items and that it has to diversify its revenue sources.
Over the past 20 years, the government has conducted several reviews and consultations on its revenue system to explore how it can be diversified. Yet, each time after the studies, no change was implemented.
The existing revenue system has worked well in the past but it has led to serious inequalities in wealth within the Hong Kong society. A review of the system calls for the Goods and Services Tax (GST).
Hong Kong has a narrow tax base, where only two out of five workers there pay salary taxes. This has resulted in up to 60 per cent of the government’s revenue from income tax coming from the top 5 per cent of income earners.
So, a single-rate GST could help broaden the tax base in Hong Kong and diversify the government’s revenue.
The GST had been mooted in Hong Kong in 2006 before but plans to implement it were killed due to strong resistance from taxpayers, politicians and journalists..
‘STICKY’ HOUSING PRICES
Due to the value and competitiveness of Hong Kong, the limited supply of land here and the reliance of the government on revenue from land sales, it is unlikely that we will see a sharp fall in housing prices in Hong Kong.
These factors have created a housing market that is quite resilient and resistant to downward pressures.
Of course, we saw larger declines in 2008 and 2003.
The uncertainties in the global economy and Hong Kong’s political situation might make all of us nervous. But the fundamentals now are stronger than in 2008. 2003 was also a unique situation when an epidemic led to widespread economic and business inactivity.
Studying these reasons, the current drop in prices of about 5 per cent should not be alarming as we are unlikely to see a large swing.
Simon Lee is Programme Co-Director of the International Business and Chinese Enterprise Programme at the CUHK Business School and Senior Lecturer at the School of Accountancy at The Chinese University of Hong Kong.