Many agree that the Hong Kong economy is narrow, with the percentage of bank loans geared to construction and property related activities exceeding 50 percent. Together with the vibrant finance sector, investment has been too concentrated in property and finance. The declining affordability ratio shows that other businesses will find it difficult to prosper, as home buyers have to spend a substantial portion of their earnings on housing.

Economic narrowness can be self-fulfilling. The government has been piecemeal in dealing with the rising property prices. The different types of "stop-go" or "squeezing tooth paste" strategy were used when the overheated market generated a public outcry. It did stop the property price spiraling upwards for a short time, but when the pressure is passed, the property price starts to rise again. The recent imposition of additional taxes on property transaction has also led to a slowdown price increase, but market players expect the cool period will last only until mid-2013. The bottom line is that the government is not prepared to see a drastic reduction in property prices, fearing that a property bubble would be destabilizing.

Developed land in Hong Kong occupies only about 24 percent of total. Land used for residential purposes occupies about 6 percent, which is about the same amount of land used for transport in Hong Kong. Undeveloped land occupies over 60 percent of total land in Hong Kong. It would be untrue to say there is a shortage of land in Hong Kong.

Indeed, much land is reserved for rural male descendants who are entitled to a plot of land, which could be sold for millions. This is written in the Basic Law and is a continuation of an old tradition, but it is extremely unfair in contemporary Hong Kong, as urban people may not even be able to buy their own residence. The system creates ownership distortions, unfairness and inequalities. Many descendants from the rural sections of Hong Kong have emigrated, but can still claim the land in all future generations through the male line of descent.

Developers normally apply for a "limited supply" initially, but declare that price will rise in the next round of supply. The intention is to create an "upward sloping" demand so that more is demanded when the price rises. There is a lack of clarity in sales practice, involving floor measurements, legal and banking charges, pricelist transparency and so on. Other claims on the part of the developers include land hoarding and collusion, lack of competition among developers, "cross-industry" manipulation as the same developers manage the developed properties.

Environmentalists who advocated fewer high-rise buildings actually aided developers, as fewer new flats supplied mean higher prices. Banks also benefit from property speculation, as the mortgage normally requires more payments on interest than on principal in the initial years. Thus, rapid turnover of property transactions within a short time after the mortgage would mean a high effective interest rate.

As Hong Kong is the renminbi offshore center, renminbi would enter Hong Kong massively, encouraging mainland residents to buy property in Hong Kong. The imposition of the additional tax would only have a temporary effect, as renminbi is appreciating by about 12 percent annually, including inflation. The net effect is marginal, as the purchase of property in Hong Kong would turn the renminbi cash into wealth of the buyer.

The solution to the property market in Hong Kong is to go back to the economics basics that housing is a necessity, while property is an investment. With the flourishing speculative market, there is no single policy to contain property speculation. The recent tax on property transaction has resulted in new speculation in car parks, retail shops and offices.

To contain property speculation requires multiple coordinated policies, including increase in land supply, revival of the HOS and similar systems, and new policies on redevelopment. Land reclamation can be more efficient. Laws and regulations on sale practices, charges and activities of the real estate sector have to be instituted so as to generate a more consistent, reliable and transparent system.

In the old days, top civil servants were given large quarters to live in so that vested interest in property speculations was discouraged. Today, many "experts" involved in the government process of property policy decisions are former property agents and speculators. Impartiality in their recommendation is in question.

The culture in Hong Kong is that property ownership is a must. Speculation is the easiest way to increase one's wealth. Consider the culture of some developed countries where a "one name, one property" strategy is applied. A person will be entitled to the ownership of one property free of tax, but heavy tax is levied if the person holds the second property or more. The idea is to encourage property ownership, but not property speculation.

The author is an associate professor in the Department of Economics and Finance, City University of Hong Kong.

(HK Edition 12/12/2012 page3)