Generation 40s – 四十世代

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Why Hong Kong is failing to rein in housing prices

CommentInsight & Opinion
2017-02-23
Victor Zheng and Roger Luk say the government’s control measures, which are meant to favour end users, are in fact working at cross purposes due to the over-regulation of mortgages. As a result, the secondary market is stagnant and unable to match supply with demand to moderate prices

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


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61 sq ft flats in Hong Kong? Why not just bury us in coffins and be done with it?

South China Morning Post
Comment›Insight & Opinion
2016-10-28

Yonden Lhatoo

Yonden Lhatoo despairs at the prospect of property developers selling ever-tinier homes to maximise profits at a cost to humanity

“I’m down so low … I declare I’m lookin’ up at down.” Blues musician Big Bill Broonzy sang these famous words in a summation of the sense of hopelessness prevalent during the Great Depression of the 1930s.

Fast forward to the present, and British comedian John Oliver captures the essence of sinking to new lows in his own irreverent style. “Let me just remind you that last Sunday, I told you if you looked above the clouds, you would see rock bottom. But if you look up there now … you will see, right up in the distance, where we were this time last week. Because since then, we have sunk so low, we are breaking through the earth’s crust, where drowning in boiling magma will come as sweet, sweet relief.”

Oliver was talking about the depths to which the US presidential race has sunk, but allow me to borrow his wicked words to illustrate what’s happening to Hong Kong’s property market.

Emperor International Holdings has entered the hall of shame for heartless developers putting profit before people, with plans to build the tiniest homes in the city. With these 61.4 sq ft shoeboxes being mismarketed as homes for humans, can we sink any lower in dehumanising the population of one of the most prosperous cities in the world?

Even Stanley Prison offers more living space for criminals, with the standard jail cell measuring a relatively luxurious 80.7 sq ft.

The only thing left now is to put us all in coffins and be done with it.

And since this is Hong Kong, after all, I wouldn’t put it past our developers. You only have to look at the price-gouging business of running columbariums, where Hongkongers are forced to store the ashes of the deceased in 1 sq ft wall niches.

People get emotional about killer whales in captivity, and how confining them in their marine park tanks is the equivalent of keeping a human in a bath tub all his or her life. Boredom, depression and frustration lead to self-harm and aggression.

Hello? That ring a bell, humans in Hong Kong?

Far more informed and astute commentators than myself have linked the social problems in our city, especially the growing tendency among youth to lash out at the establishment, to housing. It’s just so basic.

When – not if – we have the next iteration of the Mong Kok riot, let’s not ask “why” or “how” any more. Our Ides of March is there for all to see.

I’ve said it before and I’ll say it again. There is enough land and wealth in Hong Kong to house every citizen in relative comfort and dignity. What there is an acute dearth of is the guts, political will and generosity to achieve it.

And yet you heard development minister Paul Chan Mo-po: “The government does not have a magic wand to create land out of nothing.”

Nobody is expecting you to wave any magic wand, Professor Dumbledore. You may be one of our harder-working ministers, but it’s time we all snap out of our lotos-eating reverie and get cracking on the obvious solutions.

For a start, minister, do something about developers’ ample land banks and shameful practice of hoarding empty flats to keep property prices artificially inflated and above the reach of the average Hongkonger.

Perhaps we should begin a public database of the wealthiest and most powerful people in this city, both in the private and public sectors, to give everyone else an idea how much room they have to swing the proverbial cat in. Naming and shaming ought to be a good start, privacy be damned.

I can see the orcas bursting out of their tanks already in outrage.

Yonden Lhatoo is a senior editor at the Post


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‘Do less, err less’ attitude lives on in the Hong Kong government

South China Morning Post
Comment›Insight & Opinion
2016-09-28

John Chan

John Chan says the Wang Chau row exposes the mentality of officials who are quick to shirk responsibility for unpopular decisions, and our small-circle chief executive election only makes things worse

Brownfield sites in the New Territories go back a long way. Back, in fact, to the mass occupation of government and privately owned rural land for industrial and commercial use, in most cases illegally. It was regularised through the granting of short-term licences and waivers.

However, what started as a policy of tolerating in the short term the illegal occupation of government land, and allowing deviation from prescribed use on land parcels not immediately required for development, has fostered widespread abuse. Worse, it has become a tool used to regularise trespass and breaches of use. Many see this as caving in to vested local interests.

The government is pushing on with the first phase of the Wang Chau development plan in Yuen Long, evicting the non-indigenous villagers living on a green-belt site to build 4,300 public housing units. But it has taken no steps to terminate the short-term licences and waivers granted to the adjacent brownfield sites so that the remainder of the 17,000 planned units could be built.

Things turned ugly when both the chief secretary and the financial secretary denied playing any role in the decision to defer the project. Hong Kong people have been left wondering why no one in government, other than Chief Executive Leung Chun-ying, seems to have been responsible.

At a press conference on the issue attended by both Leung and Financial Secretary John Tsang Chun-wah, Leung said it was “his decision” as chairman of the Wang Chau project to develop it in phases, by adopting the Housing Bureau’s recommendation to build 4,300 units in the first phase, without touching the adjacent brownfields. He choked back tears when he talked about the difficulty faced by his government colleagues in “trying to find parcels of land bit by bit”.
The hindrance Leung faces in finding land for housing comes not only from vested interests but also from bureaucrats’ unwillingness to shoulder responsibility

It is obvious that the hindrance Leung faces in finding land for housing comes not only from vested interests and the Heung Yee Kuk, but also from bureaucrats’ unwillingness to shoulder responsibility.

Tsang, as chairman of the Steering Committee on Land Supply, the committee tasked with working out the details of the Wang Chau project – according to Leung – said earlier it was not the committee’s decision to defer the project. When asked at the press conference whether he agreed with Leung, the grim-faced Tsang said, “You always agree with your boss. No question about that.”

People were astonished to hear such an answer from the mouth of one of the top members of the SAR government. Tsang was one of the top officials (alongside the chief secretary and secretary for justice) to have attended a meeting chaired by the chief executive in January 2014, during which the decision on Wang Chau was made. Yet, Tsang acted as if he had nothing to do with the decision.

I sympathise with Leung. Ahead of the chief executive election next year, he has become a lonely figure at the top, with no one in the top echelon of government willing to come forward to share responsibility for the unpopular decisions, even though such decisions are supposed to have been made collectively.

During the colonial era, frontline civil servants had a saying: “The more you do, the more you err; the less you do, the less you err; and you don’t err when you do nothing at all.”

The wishy-washy “you don’t err when you do nothing” type of remarks by Tsang to distance himself from the Wang Chau decision typifies a nonchalant bureaucrat’s thinking. One man’s will to govern is not enough when his team has become a bunch of unenthusiastic bureaucrats waiting to see who will be the next boss.

Given his lack of a mandate under the current electoral system, the head of this lame-duck government will be a lonely man in Government House from now until the chief executive election next March. And, since the election will remain in the hands of a small circle of voters, things are unlikely to improve for whoever takes up residence on Upper Albert Road after June 30, 2017.

John Chan is a practising solicitor and a founding member of the Democratic Party