Oriol Caudevilla suggests practical ways to resolve the city’s housing problems – including using the fringes of country parks and converting industrial land and buildings for residential use.
As I said in my article “Singapore’s sell-by date could solve land hoarding in HK” (July 27), Hong Kong has big issues regarding property prices: They have never been higher. According to the Centa-City Index, real estate prices in Hong Kong have increased almost by 300 percent from 2003 to 2018.
In this article, I will not dwell on the factors that stimulated real estate prices to an unprecedented level, but would rather discuss whether there is a threat of a property bubble in Hong Kong, and, if there is, whether it is likely to burst.
In my opinion, there is undoubtedly a potential property bubble considering the three-fold increase in property prices in the period 2003-18. Let me cite studies like the UBS Global Real Estate Bubble Index Report (2017), which stated that Hong Kong might be facing another financial bubble as current housing prices are seen as “fundamentally unjustified”, that benchmark metrics such as the previously quoted price-to-income and price-to-rent ratios have reached all-time highs.
For me, there are three main factors that foretell a property bubble: the lack of building land, inadequate government policies, and the constant globalization of the financial markets.
Regarding the lack of building land, there is a big mismatch between the demands of society and the supply of land. Hong Kong has more than 7.2 million residents crammed into a relatively small land mass. This land mass, per se, is not so small, since Hong Kong has a total land area of 1,104 square kilometers. The problem here resides in the fact that almost 40 percent of the total land has been designated as country parks and special areas, which prohibits any construction on those areas. Consequently, construction is permitted only on 60 percent of Hong Kong’s land area.
This issue could be solved in several ways, but none of them seems to please everyone. It is critical for the long-term well-being of Hong Kong that solutions — even partial solutions — are found to make land available for housing. The government could find a way to stop land hoarding by the developers, a way to reclaim more land, or a way to reduce the size of some country parks.
In the last few years the government has tried to implement different policies to curb property prices by trying to eliminate speculators from the market. An example of this policy is the Double Stamp Duty. Even if it is true that these policies have reduced the sale volume by eliminating speculators from the market, it is also true that there might be a psychological effect on the supply side, as policies might affect the property developers’ perspective on the projected weakening demand and prospects of the market due to increase in transaction costs, thus the willingness for producers to supply more properties would decrease. Therefore, in the long run, the supply of properties decreases, which will undoubtedly push up the property price.
As to the globalization of financial markets, homebuyers in the past were mainly local people, while currently investors from outside the city are entering the Hong Kong real estate market. This being the case, the continuous capital inflow into Hong Kong has kept home prices high and made homeownership increasingly unaffordable.
So will this bubble burst any time soon? My answer is no. Hong Kong’s property bubble will not burst, at least not in the near future, unless it is triggered by some unforeseen disaster. Property crashes in Hong Kong have occurred only during the SARS (severe acute respiratory syndrome) outbreak in 2003 and the global financial crisis in 2008. It was not precipitated by an overheated property market. Even if property prices are extremely high, there is liquidity in Hong Kong. Liquidity is beyond any doubt the main safety valve obviating a property bubble burst either in Hong Kong or on the Chinese mainland. Moreover, the bubble will not burst because developers will keep on raising prices while finding ways to tempt people to buy. In this case, what goes up may not necessarily come down.
To sum up, there is no magic bullet to overcome Hong Kong’s property issues in one go. It will require a multipronged approach because the community hasn’t been able to reach a consensus. The opposing sectors would have to compromise by adopting land reclamation, using the fringes of country parks, converting industrial land and buildings for residential use, even requesting the central government to apportion land near the border for our use. It’s time for everyone to think outside the box and think creatively for solutions!
The author holds a doctorate in Hong Kong real estate law and economics. He has worked as a business analyst for a Hong Kong publicly listed company.