There has been much talk about containing home-price increases in Hong Kong, abandoning the Hong Kong Special Administrative Region government’s reliance on land-based revenue, and restoring the city’s economic vigor.
The SAR government has put a lot of effort into inviting companies to operate in Hong Kong, attracting talent, and pushing mega events to enhance the city’s attraction to tourists and its standing in the international community. All this is commendable, but we urgently need a strategy to restore our fiscal sustainability because we cannot go very far without rebalancing our budget.
First, we need to consider Hong Kong’s growing population. Driven by our talent attraction and labor importation programs, the Hong Kong resident population is projected to reach 8.19 million by mid-2046. Population aging is expected to continue. The number of elderly people, aged 65 and over, is projected to nearly double by 2046. Excluding foreign domestic helpers, the number of elderly people will increase from 1.45 million in 2021 to 2.74 million in 2046. The proportion of the elderly population over age 65 will increase from 20.5 percent to 36 percent. Given the aging and population pressures and in view of the spurt of medical incidents in both public and private hospitals in the past year, we need to allocate more resources to healthcare. A third medical school and more hospitals are in the cards. With fiscal deficits in four out of the last five years, our reserves have fallen from a peak of HK$1.17 trillion ($149.8 billion), on March 31, 2019, to HK$734.59 billion, on March 31, 2024.
Ronnie Chan Chi-chung, honorary chairman of Hang Lung Properties Ltd, said in December that Hong Kong’s property sector was experiencing a systemic change instead of a downward cycle, implying that recovery to the sector’s normal path of secular growth amid cyclical swings is unlikely. This new reality is behind the multiple withdrawals from land sales by the government due to developers’ low bids.
The SAR government launched the Capital Investment Entrant Scheme on Dec 19, to attract high-net-worth individuals, new capital and talent. The government excluded homes from the eligible list to count as required investment in the SAR, fearing this could ignite an increase in home prices. My question is: Should we be so worried about home prices rising? At this juncture, should we be more worried about home prices falling?
My view about housing prices is that we should let the free-market work, while housing policy should always be based on a comprehensive comparison of social and cost benefits. Housing prices in Hong Kong are higher than those elsewhere for good reason, and trying to correct them may be detrimental to Hong Kong’s long-term interests.
Hong Kong’s housing prices are high in part because our taxes are low. We have very low salary-tax rates (Singapore’s top marginal tax rate is 24 percent; the United States’ top marginal tax rate is 37 percent plus state tax rates that can reach 13.3 percent). Our rates charged on properties that are similar in substance to property taxes in the US and elsewhere are generally much lower. We do not have a goods-and-services tax. We do not have a tax on capital gains nor an inheritance tax. Our city is safe. Moreover, we have a huge public housing sector covering about half of Hong Kong’s population. Using the ratio of home prices to overall median household income as a benchmark in comparing affordability is misleading. We should instead use the median after-tax income and exclude households living in public housing when computing affordability.
It is important to remind readers that the home-price collapse is strongly and inversely correlated with the suicide rate. During the housing price decline from 1997 (peak price) to 2003 (trough), Hong Kong’s suicide rate climbed steadily from 11.9 to 17.7 per 100,000 people; 17.7 is our historical high. Home prices began to rise after bottoming out in the summer of 2003, and the suicide rate kept falling, to 12 in 2011. In 2021 it was still 12.1. Since then, as home prices fell, the suicide rate rose to an estimated 14.2 in 2022.
I would venture to suggest that if our home prices were to stay low and if homes could not be relied upon as a store of value, then smart money would leave Hong Kong to buy properties elsewhere. Such a capital flight would drag down our economy and adversely affect our fiscal position. Raising taxes would further hit home prices and commercial property prices, and fiscal sustainability would not be restored.
Our inflation rates are now uncomfortably low for the principal reason that we have suffered huge wealth losses on account of weak stock prices and real estate prices. A huge loss in wealth could be a prelude to deflation, which we witnessed after 1998. Although the annual inflation rate in Hong Kong ticked higher to 1.5 percent in June from 1.2 percent in the previous month, it is still very low, suggesting weak consumption demand. Provisional figures from the Census and Statistics Department show that total retail sales in May decreased by 11.5 percent year-on-year, following another double-digit year-on-year decline in April of 14.7 percent.
To restore fiscal health while keeping our low tax-rate regime, we need a vibrant housing market. We should not encourage speculation and should not artificially limit land sales to boost home prices. But we should remember the value of homes as a store of value. I would not worry about home price increases if home purchases by investors are permitted under the Capital Investment Entrant Scheme and trigger such an increase. Destroying the value of homes as a store of value would destroy our fiscal sustainability.
The author is an adjunct research professor at the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute and the Economics Department, Lingnan University.
The views do not necessarily reflect those of China Daily.
