More on property prices

My post about the effects of the government's land policy has prompted a lively debate over at the Gweilo Diaries

Predictably, it has caused outrage from at least one property owner, who assumed that (i) I don't own property and (ii) that I was advocating that prices should fall. Conrad weighed in to support the contention that prices are too high, and arguing that the government should get out of the market.

I wasn't specifically arguing in favour of lower property prices, though I can see why it was interpreted that way. My point was that the current arrangements obstruct the transformation of industrial areas to residential and commercial use, and one suggestion I made was that the lease premium should be replaced, possibly by a profits tax (so the government should benefit as these areas become more attractive and prices rise).

I can't see the point of anyone advocating higher or lower property prices. It is meaningless when an individual says it, and worrying when governments say it because it implies they don't have anything meaningful to say. We should be thinking about the real objectives, and only then do we need to concern ourselves with the impact on property prices. I can't see how high property prices can ever be a legitimate policy objective, though price stability may be a desirable aim if it doesn't conflict with other policies.

On the other hand, arguing that Hong Kong needs more (or better/larger) apartments seems like common sense. I wasn't arguing for the release more land for apartments, just that we could make better use of the land we already have available (primarily on what are often called brownfield sites, but perhaps also the land that property developers are holding back).

If that resulted in a modest fall in property prices, so be it. I think Hong Kong could cope.

Conrad goes further and argues that the government should sell the freehold of all property in Hong Kong and get out of the market altogether. This would be a massive undertaking, and the logistics of selling freehold to the owners corporations (which is how I assume it would be done) is not to be under-estimated, and it would keep the legal profession busy for several years! Having been involved in acquiring the freehold to an apartment block in the UK on behalf of myself and other leaseholders, I can predict that it will be hard work for all concerned!

Is it possible? Yes, I think so, because most apartments in Hong Kong were sold on short leases. One of Conrad's readers apparently has 879 years left on his lease (from an original term of 999 years) but he was one of the lucky ones, and that is not available any more! Most home owners will have a lease of less than 100 years, and since the handover, new leases are for 50 years, and (if I understand it correctly), can be extended for a further 50 years without payment of a premium. More information here. What effect would these changes have on property prices? I don't claim to know the answer, but it seems fairly certain that as it would increase supply it would also reduce prices, which is what Conrad says he wants. The big question is how far prices would fall. Maybe not as much as people expect, because I am not convinced that Hong Kong prices are really excessive by international standards, though it is very difficult to compare them because apartments here are small, but (arguably) make better use of the available space. Also, Hong Kong still only has a limited supply of land, and there is still significant demand, both from putative first-time buyers and from existing owners who would wish to upgrade. I don't believe these people are staying out of the market because they don't have money, but rather they are worried about falling prices.

Is it a good idea? Broadly yes, because it just doesn't seem logical that the interests of property owners should be more important than providing decent homes at affordable prices, and also because the government should stop interfering in the market.

The problem with Conrad's proposal is that it would most likely be very good for some people (owners of land and industrial buildings), but bad for others (existing home owners, or at least the ones with substantial mortgages and/or multiple properties). There would need to be some mechanism in place to deal with that, and it would not be easy to get it right. The government would also need to give a lot of thought to the question of how to introduce these changes so as to prevent it causing undue problems (if we accept that a big fall in property prices would be disruptive to the economy). The other big issue is how the government would balance the books if it could no longer raise revenue through selling land and collecting Lease Premiums.

However, being realistic, there's very little chance of anything so radical happening anytime soon. Which is why I think that it's better to focus on smaller-scale problems that perhaps can be addressed. Like the regeneration of some of the industrial areas.

The only serious concern raised over at the Gweilo Diaries (apart from the impact on property prices) was that residents might complain to the government about blasts of diesel exhaust in their converted lofts. I find this puzzling for two reasons - firstly because there are already plenty of people living in (or adjacent to) industrial areas, but usually in low-end accomodation, and secondly because I would expect that the transformation of these areas to happen fairly quickly. It would be in the interests of the property owners to convert from industrial to residential use, and if the government was not preventing it then logically the whole neighbourhood would be transformed within a few years. Anyone who bought property in Docklands, or the centres of cities such as Birmingham or Manchester, while the regeneration was in progress would have suffered some inconvenience but got a real bargain. Those who came later paid more but didn't have the problems.

Finally, in answer to the point about my own self-interest, I am indeed a property owner (with a mortgage).

Original Post