Solution to the Chronic Problem

November 17, 2009

The exorbitant price of a penthouse unit at 39 Conduit Road last month, reportedly a world-record took the property market by surprise, leaving many wondering how much higher prices can go. Succumbing to outcry from the media, the Monetary Authority has tightened lending policies on luxury properties by reducing the mortgage ceiling from 70% to 60% for properties worth HK$20 million or more. The Authority further asserts that it is closely monitoring the situation and is contemplating more cooling measures should the price rocket unabated.

In his policy address last month, Chief Executive Donald Tsang claimed what was happening in the luxury market would not have any effect on the mass market. A few days later, he retracted under media pressure and expressed concern at the escalation of luxury property prices. Officials vowed they would introduce more measures to cool down the market if the new mortgage ceiling was not effective. Measures yet to be confirmed included increasing the supply by expediting the construction of some MTR Corporation projects, which are majority-owned by the government.

Government bureaucrats are usually lag behind the market. Last September sales slowed down although prices kept skyrocketing, particularly in the high-end sector. It is understood when prices are hitting record highs while sales activities are shrinking, market adjustment is imminent. The number of sales transactions of luxury properties dropped by 20% in September compared to August, and by a further 30% in October. Spurred by the price rally in the high-end sector, the mass market has since the beginning of the year gathered its pace in price hikes. In the wake of a sluggish luxury market, the mass market also lost its steam as sentiments changed. This happened well before the government introduced “cooling measures”. Within weeks, government officials claimed credit for the adjustments, not realising the market had already corrected itself through the effective market mechanism before their action.

The government has not identified the real cause for the irrational price hike in the luxury market. The root of the problem is supply, not demand. Hong Kong has for many decades experienced a chronic shortage of supply and in recent years the problem has become more acute in the luxury sector. Economic growth of the wealthy population in Hong Kong and Mainland China has tremendously expanded. Over the years, a huge demand for large, luxurious residential accommodations were created, which could not be satisfied with the existing stock and trickle of supply that comes only from small scale redevelopments. Instead of increasing land supply in the luxury market, the government embarked on suppressing the demand by its cooling measures, including tightening its lending policy. The result will be, similar to previous cycles before, that the ultra-rich will still be buying but in a less frenzied manner. Coupled with the buying spree from nouveau riche in the Mainland who have a penchant for Hong Kong’s luxury properties, prices have been pushed to historical levels. The wealth gap widens as a result, and the middle class suffers. They represented the bulk of purchasing power of large units in the early days but now have to be content with, despite economic advancement, no improvement in living conditions due to their inability to afford new flats.

It seems that the most effective solution is to increase land supply for luxury residential properties especially in the traditional upscale locations like The Peak, South Side and Mid Levels. It’s not a matter of wisdom but a matter of determination to address the chronic problem at its root.

By K.S. Koh