Last November, the Hong Kong government again raised the stamp duty for buying residential property, yet housing prices also reached a new high. Apparently, these additional “spicy” measures could not arrest the price hike. For the past four years, the government has endeavoured to stabilise the housing market, but in vain. So, why don’t these demand-side measures work?
When the global financial tsunami hit in September 2008, Hong Kong’s housing market was already grossly imbalanced, with a mismatch in demand and supply. Owing to the city’s linked exchange rate system, low interest rates and quantitative easing in America, excessive liquidity has altered the landscape of the housing market.
Since 2009, the government has introduced various measures in an attempt to cool excessive demand, including increasingly aggressive controls, from 2012 onwards, that are meant to prioritise homebuyers and depress investment demand, particularly from non-residents. Yet, prices had risen a further 50 per cent by the end of last year, notwithstanding the fact that the US Federal Reserve had started to raise interest rates a year earlier, in 2015.
The measures were supposed to drive away speculators and investors, leaving behind end-users. But it has not been the case. Where did the “spicy” measures go wrong?
The taxation measures set out to suppress non-user demand with a levy, while the mortgage measures are meant to give users priority. Together, they are supposed to facilitate the ownership of housing at an affordable price with affordable financing. Unfortunately, as it turned out, the measures worked against each other, with undue restrictions on mortgages offsetting the advantages in taxation.
Mortgages are probably the safest form of lending but our bureaucrats think otherwise. With the financial crises of 1997 and 2008 still fresh in their minds, they fear a recurrence of negative mortgages and systemic risk. Those so-called “countercyclical” measures – including a 40 per cent down payment, stress test, maximum tenure, maximum debt service requirements and so on – induce a sense of comfort among bureaucrats, but they fail to see that the subprime mortgage crisis was unique to America.
The over-regulation of mortgages has brought undesirable side effects. Trading up is out of reach. The secondary market is quiet, thus losing its role of matching demand and supply through price negotiation. When the resale market is not functioning, the primary market (new development) dominates. Around 20,000 units of new private housing come into the market each year, accounting for 5 per cent of the housing stock but 30 per cent of transactions in recent years. Why?
Homebuyers are turning to the primary market due to practical considerations. Developers are counteracting the “spicy” measures with self-financing by way of a second mortgage to help buyers with the down payment. As it is tantamount to a deferral of receipt of payment, sellers in the secondary market are unable to match such terms.
In addition, developers are offering tailor-made units that match affordability. They are building smaller flats while upholding high prices (in terms of price per sq ft). Studio flats of less than 200 sq ft are not uncommon.It explains why many Hongkongers worry about further price hikes despite the government’s control measures.
The taxation measures were supposed to turn the housing market around in the buyer’s favour. However, they have benefited developers simply because the mortgage terms are too harsh. Even genuine homebuyers find it hard to get sufficient financing. The problem with mortgage measures is they are case-based rather than portfolio-based. Regulatory parameters have become the de facto mortgage terms. The collateral damage is a grossly distorted housing market unfavourable to resale.
The “spicy” measures are supposedly contingent and targeted. But the over-regulation of mortgages has thwarted their policy intent and crippled the market. There is no better redress than reviving market dynamics. Actually, banks know better than bureaucrats about credit and risk management. To turn the market around, a two-pronged approach is necessary:
First, abandon case-based regulation, such as setting ceilings on mortgage ratios, debt-service ratios, tenure and so on, and replace it with portfolio- and risk-based regulation. Second, set portfolio-based regulatory parameters in terms of mortgage ratios, debt-service ratios and stress tests. If any bank does not meet them, it should buy mortgage insurance.
The primary argument for demand-side management measures is the prolonged shortage of supply and falling affordability. However, it is not supported by the latest official figures. At the end of 2015, there were 1,092 domestic residences for every 1,000 households on average. The 5 per cent rate of public housing vacancy is structural, but the 14 per cent figure for private housing suggests a mismatch.
One may infer that there are flats seeking occupants and households seeking accommodation. Actually, there has been an excess of private housing for years. If the government’s measures were effective, the excess ratio would not be three times the structural vacancy.
Meanwhile, the policy goal of allotting public rental housing to households within three years of application is still unattainable, and the queue is growing fast. Even if these demand-led measures were needed, they would not help resolve the problem.
Public and private housing are mutually exclusive and interchangeable. The re-emergence of subdivided flats in private housing means that the core problem is not an imbalance but a mismatch of demand and supply. Without a holistic housing policy, the current measures are driving those still eligible for public housing to queue for it indiscriminately, thus distorting the picture. Apparently, the government is still undecided about the policy for subsidised housing, as evidenced by the pilot sale of flats supposedly for rental. Should our housing policy be primarily accommodation-based or ownership-based?
It is often said that businessmen are smarter than bureaucrats in challenging markets. There is no surprise that the “spicy” measures and housing prices are trapped in a vicious cycle as mortgage measures in particular defy market reality. Housing demand and supply are not synchronised. The coexistence of public and private housing only adds to the complexity. Unless and until they are separate markets and market dynamics is restored, the impasse will carry on.
Dr Victor Zheng is assistant director of the Hong Kong Institute of Asia-Pacific Studies at the Chinese University of Hong Kong. Roger Luk is a retired banker and an honorary research fellow at the institute