New Era

April 5, 2012

This year will go down in Hong Kong’s real estate history as the beginning of a new era, when the ecology of the market changes as the newly-elected Chief Executive of Hong Kong SAR, Leung Chun-ying, takes over the reins from Donald Tsang on 1 July, 2012.

Given his background and track record, we believe CY Leung will implement new land and housing policies in an effort to make room for more development in both the public and private housing markets. The existing market infrastructure will be reshaped to allow more players, more affordable properties, more types of properties and, most importantly of all, more supplies to address chronic shortages, particularly in the residential property sector. The days of the oligopoly that has plagued Hong Kong for three decades are numbered.

Since the 1980s, when Hong Kong’s economy started to change from industrial production-based to service-based, there has been a growing middle class demographic comprised mainly of a well-educated professional and technical workforce. Coupled with population growth accelerated by an influx of mainland Chinese immigrants, the demand for housing has escalated exponentially, exerting tremendous pressure on public as well as private housing.

However, with the supply of land tightly capped by the Joint Declaration between the British and Chinese governments as part of the negotiation on the handover of Hong Kong’s sovereignty to China in 1997, a huge gap between supply and demand began to develop. After 1997, when the new government tried to alleviate the shortage by increasing land and housing supplies, the attempt halted in 1998 due to the Asian financial crisis. Hong Kong’s economy spiralled downwards over the following years, dragging with it property prices, which lost 70 per cent of their value, until 2003.

According to one count, as many as 200,000 out of 1,900,000 households saw their home values drop below their outstanding mortgage, and therefore were under financial stress as banks recalled loans. In an effort not to repeat the catastrophe, Donald Tsang’s administration kept land supply tightly under control.

The result is one of the longest bull runs in the property market history. Property prices rocketed stratospherically, well beyond the reach of the great majority, against a backdrop of robust economic growth largely helped by China’s phenomenal growth. As land supplies dry up and property prices head for the sky, many small to medium developers are being edged out by a few large ones, who in turn have more sway in benchmarking the price.

This has led to growing social calls for affordable housing. Today, when the middle class cannot afford a reasonably sized flat and they comprise the mainstay of the population, the affordability issue has become a social problem that will shake the administration’s governing foundations.

To address the situation, the new government must bring in new thinking. One of the fundamental causal problems is land supply shortage. It is therefore reasonable to expect that new land policies will revolve around increasing the supply of land for new development, rejuvenating unused or under-utilised land and housing resources, and creating space for more diversified uses.

The government needs to review, re-assess and redraw its long-term housing policy, land use policy, building regulations and town planning. This would satisfy demand in both number and versatility, and cater for further development in light of economic fusion with China. And this requires swift action before the social problem aggravates into a matter of social unrest. In his campaign for the position of Chief Executive of Hong Kong, CY Leung reiterated the dire need to increase land and housing supplies. CY is a man of action and we believe he will act soon.

By Koh Keng-shing