Whether we like it or not, the housing market always plays an important role in the economy. This was so in the past, and is the case now, and will continue to be so in the future. This applies to Hong Kong, the Chinese mainland, Japan and the United States. Even as we move into a new era of economic development, with new quality productive forces driving innovation and economic transformation, the housing market will continue to serve as a store of value, an important collateral for business loans, an important link to many sectors of the economy — particularly banking and finance — and a vehicle for investment and even speculation. Highs and lows in the housing market will have huge effects on both consumption and investment.
I was aware of the possible negative effects of housing speculation and had proposed, as early as 1990, that we should introduce a housing price index futures market in Hong Kong. Homeowners who sense the housing market will fall could sell short in the futures market to hedge against a market reversal instead of having to sell their homes and rent an apartment. Speculators who think housing prices will rise could buy in the housing price index futures market, instead of competing with users. Homes are chunky objects with a huge price tag. But housing price index futures can be in rather small units. I spoke with two heads of the Hong Kong Exchanges and Clearing Ltd, but the idea never took off. In the US, the Case Shiller housing price index futures started trading on May 18, 2006.
President Xi Jinping has been aware of the many excesses in the Chinese mainland’s housing market and in October 2017 firmly stated that homes were for living in and not for speculation. Soon after, the Chinese mainland introduced various curbs on home purchases, and in 2020 announced the “three red lines” to curb excesses among some private developers. The three red lines are: requiring that their liability to asset ratio must be less than 70 percent; that net debt to equity ratio must be less than 100 percent; and that the cash to short-term borrowings ratio must be greater than 1. These red lines hit highly leveraged developers hard. Many have failed, and many others are still struggling. Xi was certainly right that many developers were excessively leveraged and that these excesses needed to be checked. Today, the mainland has to some extent relaxed these requirements through a “white list”. Those that are found to be running their businesses reasonably well but who nevertheless need assistance are offered help notwithstanding that they are violating one or more of the red lines. China’s leaders are known for their pragmatic and scientific approach to public policy, and this is particularly important for the country’s economic resilience.
It is far better for the government to offer basic homes to all Hong Kong families who will live in such basic but decent accommodation, and let those who want to live in better homes or to profit from investing to opt out and seek their dreams in the private market
I congratulate John Lee Ka-chiu’s administration for finally abolishing all the Special Stamp Duty and related stamp duties that had obstructed the free functioning of the property market, and I congratulate the Hong Kong Monetary Authority for removing the stress test requirement for mortgage applicants, which is very sensible given that interest rates clearly are now more likely to fall than to climb further. Some people, understandably, feel puzzled. Some people say that home prices are still unaffordable. So why not keep the stamp duties and let housing prices fall more? Some cited Xi’s advice that homes are for living in and not for speculation, and wondered whether the latest move by the special administrative region’s government in the housing market is in line with Xi’s advice.
It is important to note that there are two kinds of housing: private housing, and socially subsidized housing. I agree fully that subsidized housing should never be for speculation or for profit. It is built for those who need basic but decent housing. Being subsidized by taxpayers, such homes must not be for profit. Hong Kong’s traditional public rental housing (PRH) was never intended for profit. The introduction of the Tenants Purchase Scheme in 1998, which allows PRH tenants to purchase their flats at prices much lower than the market prices of private flats, was supposed to let PRH tenants share the benefits of the housing price appreciation that accomplished private homeowners enjoy. But housing price increases and capital gains do not fall from heaven. The owners of privatized flats that were traded at premium prices sought those prices because some middle-class people, who are not eligible for PRH, cannot afford the regular private homes and could only afford to buy those privatized flats. The odd thing is that the middle-class buyer, likely a taxpayer, who had made it possible for the original PRH tenant to enjoy years of low rents, now becomes once again the benefactor that allows the lucky beneficiary to enjoy a last golden handshake. The middle-class household now moves in the aged privatized PRH flat. The original PRH tenant moves out and is likely to trade up to a better private flat.
Hong Kong’s conundrum lies in that keeping a means test for housing benefits and allowing beneficiaries to profit from the housing benefit will attract rent-seekers. The dictum of “homes are for living in and not for profit” must apply strictly to all subsidized housing programs. Otherwise, widespread rent-seeking will occur and hurt our competitiveness. It is far better for the government to offer basic homes to all Hong Kong families who will live in such basic but decent accommodation, and let those who want to live in better homes or to profit from investing to opt out and seek their dreams in the private market.
The author is director of Pan Sutong Shanghai-HK Economic Policy Research Institute, Lingnan University.
The views do not necessarily reflect those of China Daily.
