Responding to lawmaker Louis Loong Hon-biu’s question about when the Hong Kong Special Administrative Region government would abolish all the “demand management” stamp duties, Secretary for Housing Winnie Ho Wing-yin repeated the official line: The recent adjustment was made after careful consideration of the entire economy and the market conditions, and is appropriate given that housing prices are still unaffordable.

Her response made me truly worried. Is the government going to keep all these measures until housing prices fall another 20 or 30 percent? If the government goes down this route, it is likely that by the time housing prices have reached this target, many people will still find prices unaffordable because their incomes have fallen further, or they have lost their jobs.

READ MORE: ‘HOS II’ would hold out ray of hope for residents

The Hong Kong Monetary Authority just reported that the number of residential mortgage loans in negative equity has jumped to 25,163 cases by the end of December, up from 11,123 cases just three months ago, thanks to a secular decline in housing prices since January 2017. 

As housing prices fall, the wealth of homeowners has fallen, compounding the negative-wealth effect of the stock market decline. Not only Hong Kong’s consumption but also Hong Kong’s many small businesses are adversely affected. The collateral value of business owners’ homes has fallen, and many businesses are on the verge of collapse. This will translate into a bigger fiscal deficit as the government will have to reimburse lenders that had lent money on the government’s loan guarantees.

As housing prices fall, the wealth of homeowners has fallen, compounding the negative-wealth effect of the stock market decline. ... I would advise that the government ensure housing affordability only through its Home Ownership Scheme (HOS) program, and leave the private market alone

I would advise that the government ensure housing affordability only through its Home Ownership Scheme (HOS) program, and leave the private market alone. My proposal for Home Ownership Scheme II (HOS II), modeled after Singapore’s Housing and Development Board housing but adjusted to Hong Kong’s conditions, will do exactly that. Eight times median annual income for an economically active household as I proposed would be affordable. Those who want bigger flats and a better location would need to buy in the private market at free market prices. Why should the government worry about the affordability of private-market housing? If no one can afford them, prices will come down. Hong Kong families would know that an HOS housing flat is available. Though modest in size and not in a preferred location, the government would ensure that these homes are served with public transport adequately.

Recently, a flat at Mei Foo sold for HK$3.88 million ($496,000). The original owner paid HK$3.98 million in 2014. Given the inflation in the intervening years, there has been no capital appreciation at all. The flat, with a usable area of 437 square feet (40.6 square meters), is affordable in the sense that its price is now less than eight times the median annual household income. Ho would note that there are many homes still selling at prices well above the “eight times multiple”. But Hong Kong is supposed to be a free market economy. Why should we worry?

I do, however, worry if the housing market continues to dive, because this will seriously affect Hong Kong’s fiscal sustainability, weaken the economy, and drive many middle-income households into despair. Many will lose their homes and be punished for their votes of confidence in Hong Kong’s future and taking the courage to buy a home. As our middle-income households suffer, the need for government help will increase. I know of a family that lost its home around the year 2000 and is now housed in a public rental housing flat.

The property market will always be an important part of the economy. This is especially true for Hong Kong. We have been able to maintain a low tax rate regime thanks to the contribution of the property sector. A recent article that I co-authored with a Lingnan University colleague noted that there was a one-way causality from home prices to government revenue and to government expenditures, suggesting that while soaring home prices are a frequent complaint in Hong Kong, nevertheless the government has been able to boost its coffers and to expand its spending, particularly in welfare and healthcare, which have been rising sharply in recent years.

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I do not, of course, advise that the government artificially boost home prices or land prices in any way. Maintaining a free, vibrant, private market for housing, however, is of the utmost importance. This means that artificial barriers like transaction taxes should be kept to a minimum. The Special Stamp Duty, in my view, is much worse than a capital gains tax. I do not support a capital gains tax or any new tax for Hong Kong at this juncture. Reviving the economy and investors’ and consumers’ confidence is, on the other hand, crucial.

The government did the right thing to stop land auctions this quarter, as additional supply on top of an already huge overhang will erode confidence in home prices. It has come to light that there are some 20,000 flats currently in developers’ hands waiting to be sold, and another 71,000 flats in the pipeline. An estimated 109,000 flats will come on the market in the next three to four years.

There is not much we can do if our export markets are weak. We should do what we can to support the economy.

The author is director of Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University.

The views do not necessarily reflect those of China Daily.