In the first quarter of this year, Hong Kong’s trade performance was doing great. Total exports of goods rose 8.4 percent. Total exports of services rose 6.6 percent. As a global financial center, the city’s banking and financial services — particularly wealth management, family offices and IPO businesses — were all doing great. Other bright spots include insurance, technology and innovation, healthcare and biotechnology, and conventions and exhibitions, among others. However, many other sectors are not doing so well and indeed continue to face difficulties. These include retail and restaurant businesses, cinemas, taxis and transportation, construction and property development. While Hong Kong achieved economic growth in the first quarter at 3.1 percent year-on-year, private consumption expenditures decreased by 1.1 percent from a year earlier. This decline was bigger than the decrease of 0.2 percent in the previous quarter.
Because consumption is roughly 67 percent of GDP, weakness in consumption is weighing down economic growth. Moreover, because many people’s livelihoods are related to consumption spending, they face declining incomes. Against this background, the mood of many residents remains depressed. We need to identify the channels of transmission so the vigor of the bright spots can be shared widely. We must activate them so more people can benefit and economic growth can be more solid.
As pointed out in my previous article in this column, the estimated number of residential mortgage loans in negative equity territory was 40,741 cases at the end of March, up from 38,389 cases at the end of December 2024. For many families, their residential properties represent the bulk of their wealth. The weakness in the housing market certainly has much to do with the lack of transmission from the bright spots.
Economists call the sector that sells services to external buyers the “basic sector”. The sector that serves the locals is called the “nonbasic sector”. In the first quarter, the basic sector did great. But the nonbasic sector was not benefiting. If the money earned in the basic sector is plowed back into the economy, the domestic economy will benefit. In particular, if these earnings are invested in real estate, the chances are that local consumption will increase. On the other hand, if the earnings from the basic sector leave the local economy and are invested elsewhere, the local economy will suffer.
On the Chinese mainland, decision-makers realize that the asset markets are extremely important and have taken major steps to boost consumption. Apart from direct stimulation through trade-in subsidies, the third batch of which is expected to be allocated this month, the authority has explicitly pledged to promote the stable and healthy development of the housing market. Apart from removing purchase restrictions and reducing down-payment requirements, the latest initiative to prop up the housing market is to tap the 10.9 trillion yuan ($1.52 trillion) provident fund for easier lending for homebuyers. Housing provident loan interest rates for first-time homebuyers can be as low as 2.1 percent (for terms up to five years) and are lower than those charged by banks. Another initiative to boost confidence is the adoption of the Private Economy Promotion Law, which came into effect on May 20.
If PRH (Public Rental Housing) tenants with incomes exceeding twice the WLIL (Waiting List Income Limit) are required to leave their flats and if they can afford an HOS II (Home Ownership Scheme II) flat, they will at least get an HOS II flat as a starter home. Trading-up activities will then help spread economic vigor across many sectors
Hong Kong’s mortgage interest rates are not an inhibitive factor as they are relatively low. With the abolition of Special Stamp Duty, and the Hong Kong Special Administrative Region government’s huge efforts to lure talent and companies to settle in the city, Hong Kong’s property market is ready for a rebound. The public housing reform that I proposed in my previous article will do the trick.
First, the modestly designed standard Home Ownership Scheme II (HOS II) flats are available to all married or engaged couples. Being smallish in size and modest in features, they are good as starter homes so that those who are financially capable of buying better homes will not apply for such subsidized properties. Moreover, those who have bought an HOS II flat will seek better homes in the private market when they have advanced financially. This design will reduce the financial burden on the government and encourage HOS II flat owners to trade up.
Second, because Public Rental Housing (PRH) flat tenants have to give up their apartments when their incomes are equal to twice the Waiting List Income Limit (WLIL), PRH flats will become less attractive. So fewer people will apply, and thus the waiting time for a PRH flat will be shortened.
Third, because HOS II homes are not an attractive investment, fewer people will apply. So the government can honor the promise of delivering an HOS II flat on demand. HOS II flats can be resold anytime without repayment of land premium or “return of subsidy”, so the number of HOS flats the government needs to deliver will be manageable. The upward movement of HOS II flat prices will be contained because people always have the option to buy a new flat from the government at around eight times the median household income for economically active families.
The design of PRH and HOS II will ensure that the private housing market will offer superior flats that can serve investment as well as dwelling purposes. HOS II owners are not allowed to buy private flats. So those who have purchased an HOS II flat and who have seen their financial situation improve will naturally trade up for a private flat. If PRH tenants with incomes exceeding twice the WLIL are required to leave their flats and if they can afford an HOS II flat, they will at least get an HOS II flat as a starter home. Trading-up activities will then help spread economic vigor across many sectors.
The author is an honorary research fellow at Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute, Lingnan University, and an adjunct professor at the Academy for Applied Policy Studies and Education Futures, the Education University of Hong Kong.
The views do not necessarily reflect those of China Daily.
