Market Instability

If affordability is the Achilles heel of Hong Kong housing, it seems to go hand-in-hand with a level of volatility or instability in the market which is damaging both to people’s housing chances but also to the Government’s ability to follow a consistent housing policy. Indeed, the post-1997 history shows a very unfortunate tendency for the Government to react to housing market events in ways which undermine its capacity to cope with future fluctuations.

Figure 8.2 shows the way in which house prices boomed and slumped around the time of the transfer of sovereignty to China, with a rise of 75 % over two years followed by a fall of two-thirds in the subsequent slump. Whilst that period was exceptional for perhaps understandable reasons surrounding regime change, of more concern is the persistent tendency of the market since 2005 to display surging increases, with year- on-year rises topping 30 % on at least four separate occasions. In 2015

Annual house price change, Hong Kong (Percentage) (Source

Fig. 8.2 Annual house price change, Hong Kong (Percentage) (Source: HK Rating and Valuation Department.)

prices were three times the level of 1995, and five times the level of 2003. Such volatility is extreme and damaging, certainly to the ability of ordinary Hong Kong residents to obtain or afford housing. It also appears to be out of line with the experience of some other comparable economies, for example, Singapore or Korea.

Figure 8.3 shows how housing completions performed during this period. Essentially the story is one of housing supply being out of ph ase with the fluctuations in demand, being high when the market was slumping in the early 2000s, and low as the recent surges took place. Despite recent efforts to raise supply, the overall level of delivery (15,000 in 2014) remains well below targets and below achievements in earlier periods, for reasons discussed earlier. Supply is not the primary cause of the fluctuations in price, although the level and responsiveness of supply is a contributory factor in the recent upward movements in prices.

Whilst the domestic population of Hong Kong provides a mature market of a normal kind, there is a significant overlay to this of international investment, and this comes from two distinct sources: wealthy individuals and expatriates generally, and the new wealth coming out of

Housing completions, Hong Kong 1990-2014 (Source

Fig. 8.3 Housing completions, Hong Kong 1990-2014 (Source: Ratings and Valuation Department, Hong Kong)

mainland China. Hong Kong is particularly attractive to both groups for a range of reasons including its strong business culture and infrastructure, rule of law and effective administration, well-established and well-served expatriate community, and its currency pegged to the US dollar. Flows of funds seeking to invest in assets such as residential real estate have been reinforced by the actions of monetary authorities in both the USA and Europe and the associated low levels of interest rates.

One can discern parallels between this situation and that of London, especially, and possibly Sydney, amongst the cities considered in this volume. However, Hong Kong is a relatively small economy and these financial investment flows are proportionately a very large influence.

The HK Government has tried to damp down investor as well as general demand and speculation by a range of measures since 2010, including a ‘flip’ tax (double stamp duty on properties resold within 6 months), additional stamp duty on foreign property purchases or higher-value transactions, and higher down-payment requirements for new home- buyers. To date, these have not really stemmed or reversed the boom. Commentators argue that the market may face a downward correction or period of cooling, due to mainland China crackdown on wealthy individuals, the slump in Chinese stock markets, international perception of HK being overpriced, the likelihood of tighter monetary policy from the USA, doubts about HK growth prospects and longer-term concerns about population ageing.

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