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Balancing Act

As expected, the anti-speculation measures implemented by the government since last November failed to rein in the runaway property prices because the real culprit was not the speculative activities in the market. In his Budget Speech last month, Hong Kong’s Financial Secretary John Tsang had no new plans for cooling the property market except to increase land supply. This, on one hand, confirmed the government’s misjudgement of the market in the previous round of actions and, on the other hand, showed that it now has recognised the root of the problem and is taking steps to address the issue.

Certainly, chronic shortage of supply is one of the main driving forces behind rampant price escalations in recent years. Increasing supply would serve to satisfy the high demand rather than contain it. This is a move in the right direction. However, a new supply of land will take three to four years to produce housing to the market. Before that materialises, the market will still suffer from a severe shortage and prices will continue to grow. For the great majority of the middle class population in Hong Kong, current prices are already well beyond their reach.

Increasing supply should have effectively reduced anticipated demand. But other factors at play have served to drive prices up, including accelerating inflation, the low cost of borrowing, an influx of mainland money chasing Hong Kong assets and a robust local economy. These factors have overwhelmed the effect of increased land supply, and will continue to do so in the foreseeable future.

Those who have benefited from the economic recovery either from enhanced income or an asset value growth will keep on investing in property, as inflation has become one of their main concerns. John Tsang has hinted that the government would take other actions to cool down the market if the price escalation is not contained. However, we believe there’s not much the government can do to maintain a good balance between healthy growth and an asset value collapse given the current economic and political constraints.

By Koh Keng-shing