21 January 2020
Housing and land supply have been Hong Kong's Achilles' heel for a long time. Photo: Reuters
Housing and land supply have been Hong Kong's Achilles' heel for a long time. Photo: Reuters

How other economies control their housing market

Hong Kong’s geography can be succinctly described as having “deep and wide harbors with lots of hills and little flat land”. Housing and land supply have been the city’s Achilles’ heel for a long time.

Chief Executive Carrie Lam’s recent formation of a Task Force on Land Supply reignited feverish discussion on the issue.

Public opinion is torn on the source of land supply, such as whether to develop golf courses, brownfields or country parks.

But aside from social media comments demanding a halt to the daily quota of 150 one-way permits for mainlanders visiting Hong Kong, there seems to be little discussion on how to manage the market’s immense demand for housing.

From the most rudimentary viewpoint of economics, the government has two main ways to handle the shortage: either to tax the product in shortage (raising prices at all levels to reduce demand) or to set a quota for its purchase (rigidly limiting the quantity demanded by the market).

The past administration had imposed additional stamp duty taxation on short-period resale and foreign purchasers in the hope of dampening market demand and suppressing flipping behavior.

Inconveniently, there is huge and actual demand for housing in the local property market. The rate of vacancy by the end of 2016 is 3.8 percent; if we were to take out the 7,330 units that are vacant due to regulatory paperwork issues, the actual vacancy rate would be around 3.1 percent.

Heavy taxation has not achieved the government’s desired effect; au contraire, many buyers become more eager to make their purchases as soon as possible as they expect further taxation and measures to apply.

Professor Ho Lok Sang believes the government’s taxation on resale limited housing supply that would have been made available by users who are switching from smaller units to bigger ones.

In the five-year tenure of the previous administration, the rental index for local property rose from 114.8 to 182.9, a 26.31 percent increase, whereas the price index rose from 206.1 to 336.5, a staggering jump of 63.27 percent.

The effectiveness of taxation in cooling off the market had been grossly overestimated. Having no means to increase land supply significantly in the short term, the Hong Kong government needs to consider managing the overabundant demand in the housing market through a quota system.

Hong Kong, as a reverent disciple of free-market dogmas, may find the idea of a quota system as an egregious act of government intervention in the market. Yet the quota system is used frequently by free market economies.

The US government exercises control over the corporate emission of greenhouse gases through the quota system of carbon trading. Singapore’s car ownership is essentially done by auctioning a limited quota of vehicle licenses.

Coming back to the housing market, many markets impose a variety of barriers for foreign or non-resident purchasers. In Australia, there is the Foreign Investment Review Board under the supervision of the federal government, which screens applications from foreign property buyers.

Foreign buyers are only allowed to purchase newly built properties. The fee for processing the application is proportional to the value of the property in question. Through this mechanism, Australia is effectively using a quota system that limits demand from foreign investors whilst restricting them to new properties only.

This shelters Australians with real housing needs from being victims of foreign speculative investment.

Shifting our gaze to mainland China, we will notice that the restriction on the housing market is much more holistic. As different parts of the country are at different levels of development, housing market regulations are often drawn out by local governments as a response to actual demand on the ground.

Take Shanghai and Beijing for example. Eligibility to purchase property is linked with the “hukou” or household registration system.

Locally registered families are allowed to purchase no more than two sets of properties. Non-local families need to have paid tax and social insurance premiums in the last five years in order to purchase one set of property (and no more than that).

Beyond rigid limits of buyer eligibility, the mainland government has also worked on mortgage down payment ratio. Beijing and Shanghai both require buyers that already own property to make a greater percentage of down payment than those without property.

In Beijing, buyers who would like to purchase an ordinary flat as a second property would need to make a minimum down payment of 60 percent.

For the upper-end, non-ordinary flats, minimum down payment can be up to 80 percent. Shanghai buyers who use their provident fund for housing mortgage need to make a minimum down payment of 20-30 percent for their first set of property, depending on the size.

To buy a second set of property or for those who already have a provident fund mortgage payment record, the minimum down payment goes up to 50-70 percent.

Raising the minimum down payment ratio raises the barrier of entry for the speculative trading of property, thereby preventing people from flipping with mortgages.

The inclusion of mortgage record when considering a buyer’s eligibility is worth noting. It is meant to prevent married couples from obtaining double sets of housing-purchase quotas through a divorce. From this point of view, we can tell the detailed consideration of mainland restriction on the housing market.

Compared with the mainland’s management of housing by restricting demand, the Singaporean housing policy focuses more on the distribution of housing supply. About 80 percent of Singaporeans live in HDB flats, where strict and detailed buyer’s eligibility restrictions are imposed. In most cases, only permanent residents and citizens are allowed to purchase HDB flats.

Resale of these flats is also limited in many ways. Foreigners in Singapore can turn to the more expensive private condos, a limited market where the government does little to interfere. As most Singaporeans reside in HDB flats, flipping behavior in the private property market has limited effect on the livelihoods of ordinary citizens.

The Singaporean housing policy stands as the prime example of distributing limited resources through a quota system.

Most inconveniently, Hong Kong’s supply of public housing is staggeringly behind Singapore’s supply of HDB flats. With that in mind, if the government is determined to manage demand in the short term, it must consider regulating the private market with approaches similar to the mainland’s buyer eligibility requirements.

Hong Kong’s housing should first be given to Hong Kong citizens who have resided in Hong Kong for a specific length of time but have no property under their name.

As for the resentment created by the Hong Kong Monetary Authority on mortgage restrictions, a more nuanced approach should be considered, like the one adopted by the mainland.

Minimum down payment ratio should be lower for locals who have never had property and are buying one for their own use; it should be raised for the second set of properties and high-end properties.

The low-interest rate is one of the major contributing factors to flipping behavior in the market. If the mortgage down payment ratio were to be raised for purchasing property for investment purposes, it should dampen the housing market’s eagerness in speculative trading.

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Policy Officer, Savantas Policy Institute