Should we take Chan's 85,000 flat supply forecast seriously?

September 17, 2015 17:29
Even though there might be 85,000 residential units in the next three to four years, these are not enough to meet demand. The risk of a price slump is low. Photo: HKEJ

Secretary for Development Paul Chan recently dropped a bombshell by forecasting that as many as 85,000 private residential flats will be available for sale in the next three to four years.

That implies property prices are headed for a tumble.

That number is not the same as the controversial "85000 policy" proposed by former chief executive Tung Chee-hwa in 1997. 

But its impact is no less terrifying -- the figure reminds us of the bursting of the housing bubble in the late 1990s.

The Hong Kong property market has three similarities with the market situation in 1997. There are as many main differences.

The first similarity is that property prices today are as unreasonably high as they were then.

In January, Demographia released a survey which showed Hong Kong property prices are the least affordable in the the world, with median housing prices up to 17 times the median family income.

That compares with 8.5 times in London and 6.1 times in New York.

The second similarity is that the government is aware of skyrocketing property prices and has taken action to intervene, just as its 1997 predecessor did.

Thirdly, our economy is sluggish. Some say it's a slower version of the 1997 recession.

However, there are three major differences between now and 1997.

Firstly, the "85000 policy" was about churning out 85,000 units each year, of which 60 percent would be public housing.

The figure cited by Chan refers to private housing units which will be released over three to four years.

There will be about 44,000 new private and public flats on the market annually over the next few years, half the number under Tung's "85000 policy".

That means the risk of a slump in home prices remains low in the short run.

Secondly, the Hong Kong population has increased by 700,000 since 1997 and gross domestic product has almost doubled since then, so has demand for housing.

It's clear that even though there might be 85,000 residential units in the next three to four years, these are not enough to meet demand.

Finally, the government is far more vigilant and a lot more experienced in dealing with housing bubbles than the Tung administration.

The latter was caught off guard by the crisis, prompting it to adopt tough measures to curb speculation such a Buyers' Stamp Duty.

Moreover, the housing affordability ratio remains at just 54 percent, far lower than the 93 percent in 1997.

These suggest that housing is unlikely to burst at least in the short to medium term.

If it does, we are more prepared than we were in 1997.

This article appeared in the Hong Kong Economic Journal on Sept. 15.

Translation by Alan Lee

[Chinese version 中文版]

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Hong Kong Economic Journal columnist