The Real Estate Market in Hong Kong and Suggested Public Policies - Essay Example

? The Real E Market in Hong Kong and Suggested Public Policies Introduction Hong Kong has a population ofabout 7milion people of which close to 2milion reside in public housing. The city has about 650,000 public rental flats managed under Hong Kong Housing Authority. Housing cannot be regarded as simply a shelter since, for the majority of households, home ownership is a noteworthy form of savings and a means of wealth accumulation and upward social mobility. At the cumulative macroeconomic level, homeownership is a significant form of fixed investment and straightforwardly influences consumption, savings, and combined output over the business cycle. Hence, it is certainly inevitable that a subsidized public housing program will bear significant effects on households, the economy, and society (Feng 2010, p. 3). The account of subsidized housing policy in Hong Kong has witnessed multiple twists and turns over the decades with divergent outcomes. Frequently, the changes brought unanticipated consequences with some leading to disastrous consequences. Some of the core problems detail that property tenure and occupancy rights in Hong Kong remain erratic in which there are four critical categories of housing tenure; private sector owner occupiers, private sector renters, subsidized public tenants, and subsidized public sector owner occupiers (Lam 2000, p.397). The Hong Kong economy is credited for its legendary resilience since, despite several momentous setbacks such as Great Proletariat Cultural Revolution (1966-1976), incidents of financial and banking rises, and significant oil crises, the Hong Kong economy has remained fairly stable with no registered negative economic growth (Lam 2000, p.398). However, the financial crises of the 1997 and 2008 had a negative impact on housing and led to a substantial industry’s downturn. Historical Overview of the Development of Hong Kong’s Housing Policy The population of Hong Kong has grown consistently over the years. In the 1900s, Hong Kong’s population stood at about 300,000. An influx of refugees from Mainland China that started in the 1930s heralded several problems such as lack of housing for the refugees. On 25th December1953, a number of fires occurred in the squatter areas in Shek Kip Mei, which orchestrated the displacement of close to 50,000 people (Keung 1985, p.23). In April 1954, the government established a semi-independent body, Hong Kong Housing Authority, to render long-term improvements in the living environment, especially for the low income families. The initial low cost housing was constructed in 1958, in North Point and featured independent facilities (Yung 2008, p.6). This marked the earliest form of Resettlement Building with a total of 11,000 units of public rental housing built from 1958-1968 by the society. 1970-1985 In Oct 1972, the government announced an ambitious housing program to avail decent living accommodation to close to 1.8 million citizens in one decade. Starting from 1978, Housing Authority launched several schemes including Home Ownership Scheme (HOS) Private Participation Scheme (PSPS), plus other loan schemes. From 1973 to 1982, close to 220,000 flats were constructed (encompassing HOS and PSPS), which housed close to 1 million people (Keung 1985, p.24). 1985-2000 In 1987, the launch of Long Term Housing Strategy pursued in aid all the families to acquire suitable and affordable housing. The emphasis in this case changed from the provision of public rental units to sponsorship of homeownership among citizens as part of long-term solutions of housing problem. The strategy speeded up the expansion of HOS and PSPS and facilitated enhanced utilization of a private developer’s resources, besides the introduction of Home Purchase Loan Scheme (Yung 2008, p.7). In the Ten-year Housing Plan, (1997-2006), the housing authority oversaw the construction of more than 85,000 flats per year with public housing flats accounting for 50,000 flats. From 1997, families living in public rental housing schemes had the opportunity to purchase their flats at a reasonable price (Yung 2008, p.7). The 21st Century: The Real Estate Market in Hong Kong and Suggested Public Policies Institutional Framework for Public Housing Review This institution's commissioning in 2000 responded to rising public concerns over quality of public housing. Although the housing strategy remained provision of better housing for all within the Hong Kong Housing Community, it was resolved that public resources will only be dedicated to poor households. In order to satisfy the demand of the families within low income group, the government committed to relying on direct fiscal subsidy (Lam 2000, p.397). The role of the government shifted to guaranteeing the stability of the private sector market by evading any overlap that may arise within the subsidized home ownership market (Renaud, Pasadilla and Pretorius 1997, p.27). The review recommended the formation of a new housing organization charged with merging of the Housing Bureau and Housing Department. The other recommendation detailed the provision of a unified chain of command and the establishment of a new Principle Official charged with the responsibility for housing (Keung 1985, p.25). The evolution of the role of the Housing Authority featured advising the government on private sector property market and housing strategy and replacing the conventional “brick and mortar” provision of public housing with utilization of direct fiscal subsidies (Yung 2008, p.8). Real Estate Investment Trust (REIT) In July 2003, the housing authority consented to divest the facilities in the form of REIT. This was an indication of the government’s board principle in withdrawing from the market so as to generate extra funding for Housing Authority. Board principle details reduction of government’s commitment and duty in the provision of Public Housing and to utilize the private property market. The Way Ahead Up to now, the number of the number of people residing in public housing is still high (around 2million people). Overall, there has been no reduction in the number of tenants residing in public housing in the past twenty five years. The future role of the government will hinge primarily on land supply and public rental assistance. The core mandate of the government hinges on the maintenance of a fair and stable operating environment to guarantee consistent and healthy development of private property market. The government’s subsidized housing policy will only aid low-income families incapable of affording private rental housing. The anticipation within Hong Kong public housing market is that the government will continue to downsize and streamline the Housing Department Structure. The government also anticipates continual exercising of greater force to compel households to acquire their own flats (Yung 2008, p.8). Hong Kong’s Real Estate transactions have spiked in the last three years; this has been propelled by the outlook of more quantitative easing in other markets such as the United States. Hong Kong average home prices have grown twofold over the last four years as rock-bottom interest rates bites, driven by real-estate speculation (Lam, Lui & Wong 2012, p.301). In the meantime, mainland Chinese investors, motivated by enhanced returns and relocate their assets abroad, continue to purchase apartments in Hong Kong. From 2009, Hong Kong’s government has commenced numerous policy measures to curb rising home prices such as increasing transaction levies and increasing property available for housing development via more land sales, besides lessening requirements for mortgages. However, the efforts have significantly failed as property investments remain attractive along with low interest rates and a soaring housing demand. Since Hong Kong’s currency is tied to the U.S. dollar, Hong Kong’s monetary policy are required to echo moves undertaken by Fed, which has sustained exceptionally low interest rates since 2008 financial crisis. Thus, Hong Kong’s Monetary Authority has not been able to undertake monetary tightening measures to control property demand (Lam, Lui & Wong 2012, p.302). Literature Review The Hong Kong Housing Market Both Singapore and Hong Kong have invested massively in subsidized public housing programs on a level that is unparalleled in a free market capitalist economy. However, the two countries have placed diverse ceilings on home ownership and tenancy rights. For Singapore, the limits have permitted the institution of a lively market in financed public housing for rental, purchase, and sale. However, for Hong Kong, the restrictions have rendered the market for such housing markets absent and non-functional (Riddel 2004, p.121). Hong Kong has over the years experienced shortages of housing supply, which in turn, yielded escalating prices. This was compounded by the downturn of housing prices since the onset of financial turmoil in Asia. In order to address the problem of housing prices, otherwise labelled as “market failure,” the Hong Kong government employs its land-use planning system to enforce constraints on land supply and development (Riddel 2004, p.122). The Hong Kong residential market is distinct in a number of aspects. These include restricted land supply, high appreciation rate, high price volatility, massive public housing sector (second biggest in the capitalist world after Singapore), and few large property developers. The increased price appreciation and volatility can be considered as attributable to the limited land supply that is at the discretion of the government (Riddel 2004, p.123). Demand Hong Kong can be regarded as one of the most densely populated cities in the world with strong demand for housing been created from the minimization of the household size, coupled with an increase in population. This has largely been fuelled by widespread speculation both for consumption and investment (Feng 2010, p.4). The speculation stems from the market reality in which the rate of return on property investment has been rising significantly over the years. High Prices and/or Housing Market Volatility The housing market in Hong Kong has witnessed several significant property booms. For instance, from February 1996 to September 1997, the property index rose by over 50%. Housing demand in Hong Kong is chiefly price inelastic, but income elastic. In 1995, the percentage ratio between monthly mortgage expense and the average monthly family income ranged around 73%. This indicates high housing price volatility in which the housing appreciation rate far surpasses the inflation rate (Lai and Wang 1999, p.145). Hong Kong government has been accused of deploying short-term solutions to diminish and dampen the volatility of property price fluctuations. These solutions include instituting punitive transaction fees and mortgage down payments or launching ad hoc housing programs (such as Private Sector Participation Scheme, Middle Income Housing Scheme, Flat for Sale Scheme, and My Home Purchase Plan). Presently, some of policies directed at dampening property price increases (such as calls to place a ceiling on property purchases from foreign investors or the launch of many other ad hoc housing programs) have failed to address this problem (Leung 2004, p.249). Supply The Hong Kong government has instituted a maximum level for the quantity of government land disposal each year. Overall, land supply directly influences the quantity of housing supply by imposing restrictions on locations for housing development. All land in Hong Kong is at the government’s discretion with key supplies of land for housing development being urban regeneration. 80% of the 1,092 sq km of land (Hong Kong) is mountainous, which makes land supply in Hong Kong to be highly restricted. Since late 1980s, the public sector has dominated the supply of public housing (close to 50% of the total housing stock) (Leung 2004, p.251). The private sector role in the provision of housing is both limited and irregular, fluctuating wildly to mirror the market conditions and sentiments. The Hong Kong economy suffered under both the Asian Financial Crisis in 1997 and the Global Financial Tsunami in 2008; however, the behaviours of the housing market amid the crises were divergent (Jao 2001, p.2). A comparison of the housing price movements a year after the outbreak of each financial crisis reveals that the spectacular fall of property prices came subsequent to the Asian Financial Crisis. The decline witnessed in 1997 amounted to 45% from the pre-crisis peak (October 1998) and a subsequent fall of 39% (1998-2003). Conversely, a year after the onset of Global Financial Tsunami, housing prices were roughly at the same level in October 2009 as in September 2008, besides reaching a new height in the first quarter of 2010 (Ho and Wong 2009, p.60). The frequently cited reason for Hong Kong’s deep recession in 1997 is that the AFC burst the property price bubble and hence, produced an immense negative wealth effect. However, this explanation is often deemed as unconvincing owing to ambiguities on the transmission mechanism in which AFC burst property price bubble (Jao 2001, p.140). There is little evidence that a significant withdrawal of foreign capital from the housing market orchestrated a collapse. Thus, Hong Kong’s housing market downturn in the period ranging from 1998-2003 might have been propelled, partly, by the privatization scheme (Leung 2004, p.250). The privatization scheme introduced by the government played a significant role in minimizing existing home transactions and home prices. Discussion There are several economic reasons supporting the subsidization of housing grounded in macroeconomic considerations. Hong Kong manifests a large, but inefficient public sector housing program that falls short of meeting the evolving demands of the population. Owners of Home Ownership Scheme flats cannot manage to sell up since they have to repay land premiums at present high prices, irrespective of when they bought the property (Ho and Wong 2009, p.59). Luckily, this can readily be remedied by availing a subsidy on land values for all households qualified for homeownership. Such an arrangement would empower owners with the privilege to sell up their units on the open market and pay a land premium that is reasonable. The provision of such subsidies to large sections of the society is no more than what the Hong Kong government has undertaken. The core question hinges on whether the government has been undertaking the program effectively (Miles 1995, p.64). Expenditures on housing embody the single largest item of expenditures for the majority of households in Hong Kong. Certainly, housing represents a significant element within the macro economy and critical issues enveloping housing economics such as demand and supply and privatization of public housing bear a significant relationship with the macro economy (Feng 2010, p.1). The public housing privatization program undertaken by the government in Hong Kong yielded adverse effects on housing transactions and prices in Hong Kong. A scheme launched in December 1997 offered tenants an opportunity to purchase their units at significantly discounted prices, which in turn, reduced public housing tenants’ bids for private homes and negatively affected home transactions. These effects on housing prices were compounded by the effects of the Asian Financial Crisis (Jao 2001, p.4). Privatization is frequently believed to be beneficial to economic efficiency. Despite the fact that this impact is still controversial, any assertion that privatization could yield erosion of wealth and economic inefficiency as some of the studies suggest, may appear as ridiculous (Stein 1995, p.379). Nevertheless, it is apparent that any privatization scheme if poorly managed may yield counterproductive outcomes. Several authors have explored the impact of “housing ladder effect” or equity effect (down payment effect) and concluded that privatizing public housing cheaply could yield the erosion of equity values among homeowners, which could, in turn, spread throughout the housing market via the housing market quality continuum (Ortalo-Magne 2006, p.459). The wearing down is dynamic and downplays any static efficiency increases that emanate from the privatization process. The attractive prices availed by the Housing Authority for sitting tenants to purchase the units, which they were buying under the “Tenants Purchase Scheme” (offered up to 88% discount on the projected market price), made the buyers make a quick decision to buy, but made it uninviting for them to buy other kinds of homes (Feng 2010, p.2). Given the previous documented significant participation within the housing market, the privatization ultimately orchestrated the falling of home prices. Home Ownership Scheme (HOS) can be considered as a misnomer since the occupant of a HOS unit does not possess the same set of property rights (private ownership). Subsidy in the form of unpaid land premium availed by the government the moment that the unit was first obtained; hence, the occupant ought to repay the discounted land premium prior to the unit placement within the open market (Renaud, Pasadilla and Pretorius 1997, p.27). The price of the land premium is not essentially fixed at the time of the initial purchase and appraised with reference to the market value during repayment. Proposed Hong Kong Government’s Intervention in Real Estate Market There is a need to deregulate housing market by establishing public sector housing. This can be attained through stimulating the Tenant Purchase Scheme (TPS) on the present supply of public rental units. The other strategy that can be used is minimizing the unpaid land premium on existing TPS and Homeownership Scheme (HOS) units to match the level when the units were first completed as this will render them affordable. Deregulation can also be done by combining all future supply of public sector housing units as accessible either for rent or purchase, as well as setting the prices of the new public units at a reasonable price in order to avail an outright and substantial subsidy on land value (Feng 2010, p.3). Availing significant subsidies to households means that families can opt to sell those units on the open market, thus unlocking the hidden value to be redeployed for better use. Presently, 16% of households reside in HOS units while 31% live in Public Rental Housing units. Embracing this proposal would convert the households into a bona fide homeowner. Added to 37% of private sector homeowners, the total number of homeowners in Hong Kong could rise to as high as 84%, which, in turn, would make half the population of have-nots property owners. This will aid the Hong Kong society to regain the land value that constrained by numerous regulations disallowing bona fide ownership. The Hong Kong government should continue with its pursuit of responding to people’s aspirations of homeownership. This should be undertaken cognizance of the fact that the volatility of property prices over the last three decades surged to scales well past the capability of the poor (Feng 2010, p.5). Conclusion The privatization experience in Hong Kong indicates that the bid of the privatization program to make the economy efficient cannot be taken for granted. The circumstances enveloping a privatization program, besides the way in which the privation takes place, play a critical role in shaping the outcome. Hong Kong should take in to consideration the introduction of a Housing Price Index Future as a financial innovation tool to enrich the global property market. This would herald substantial benefits to the Hong Kong’s property market, besides steering society’s social welfare. The introduction of a Housing Price Index Futures will potentially attract significant investments by both institutional and individual investors, who will invest in it rather than the real property market. References List Feng, Y. (2010) "The benefits of introducing a housing price index future in Hong Kong," Lingnan Journal of Banking, Finance and Economics 2 (1), Article 2. pp.1-7. Ho, L. S. & Wong, W. C. (2009). The first step on housing ladder: A Natural experiment in Hong Kong, Journal of Housing Economics 18(1).pp 59-67. Jao, Y. C. (2001). The Asian Financial Crisis and the Ordeal of Hong Kong, Quorum Books, Westport. pp.140-142. Keung, J. K. (1985). Government intervention and housing policy in Hong Kong, Third World Planning Review 7 (1). pp.23-44. Lai, N. & Wang, K. (1999). Lands-supply restrictions, developer strategies and housing policies: The case in Hong Kong, International Real Estate Review 2 (1). pp.143-195. Lam, N. (2000). Government intervention in the economy: A comparative analysis of Singapore and Hong Kong, Public Administration and Development 20 (1). pp.397-421. Lam, W. M., Lui, P. L.T., & Wong, W. (2012). Contemporary Hong Kong government and politics, Hong Kong, Hong Kong University Press. pp.301-302. Leung, C. (2004). Macroeconomics and housing: A review of the literature, Journal of Housing Economics 13(4). pp. 249-267. Miles, D. (1995). Housing, Financial Markets and the Wider Economy: Series in Financial Economics and Quantitative Analysis, New York, John Wiley & Sons. pp.64-78. Ortalo-Magne, F. & Sven, R., (2006). Housing market dynamics: On the contribution of income shocks and credit constraints, Review of Economic Studies 73 (2). pp.459-485 Renaud, B., Pasadilla, B. O., & Pretorius, F. (1997). Markets at work: dynamics of the residential real estate market in Hong Kong, Hong Kong, Hong Kong University Press. pp.27-30. Riddel, M. (2004). Housing-market disequilibrium: an examination of housing market price and stock dynamics 1967-1998, Journal of Housing Economics 13 (1). pp.120-135. Stein, J. C. (1995). Prices and trading volume in the housing market: A model with down-payment effects, Quarterly Journal of Economics 110(2).pp. 379-406. Yung, B. R. (2008). Hong Kong's housing policy: a case study in social justice, Hong Kong, Hong Kong University Press. pp.6-12. Read More