Leave the property market alone

(Next Magazine, 2015/12/17, A002, Second Opinion, Bill Stacey)

Leave the property market alone

CY Leung is half right. It is not the job of the government to guarantee that property prices will not drop. As if on cue, the property market reportedly peaked in September.Yet given our Chief Executive’s uncharacteristic restrained view of the role for government in the property market, why did he take on himself the role of trying to stop property prices from rising? It is not the role of government to set any price, period.

Inadvertently, by describing the challenges the government faces in managing the property market, Leung gives us insights about why such effort will inevitably fail. In the realm of property, Leung, a trained land appraiser, is a thoughtful technocrat and planner. He realizes that influencing prices is a problem of both supply and demand. He has diligently sought out new land for supply. Repurposing land has accelerated. Since he believed that public housing was insufficient, he appropriated a larger share of the supply from private housing. Since these measures are not delivering the prices wanted, ever so logically, parks and reclamation come onto the agenda.Demand is not overlooked. The government has tried to curb “investment demand, speculative demand and demand from outside of Hong Kong”. The raft of extra restrictions and stamp duties have been effective. Transaction numbers are falling and liquidity is drying up, particularly at the higher end of the market where taxes bite most heavily.I’m sure that the architects of these policies feel that they are engaged in a noble struggle. However, the myriad unintended consequences and distortions introduced to the property market show the folly of trying to control property prices.

Rents have gone up disproportionately with less investors and more people forced to rent rather than buy. Upgrading has stalled, reducing supply as less lower-end property is freed up. Low-end property has become more expensive, because of the post-tax relative price advantage. Businesses and people have chosen places other than Hong Kong to live, reducing overall investment.In the end it will probably not even be the measures of the government that are decisive for prices, but monetary policy in the US and factors influencing demand from China.There is an alternative. Why not let the magic of markets and prices do your work for you?Demand changes quickly and in unforeseen ways. Demand for property is influenced as much by demography as by social factors like marriage patterns, divorce rates, household automation, public transport, the location of work, home office demand etc.No policy maker or planner can possibly know how these factors interact with the market and foresee their trends. Clever econometrics can help us understand these factors – after the event – but such models have a poor forecasting track record.

Yet prices discover all of these influences and where they are important. They send signals to developers about what to build, investors what is in demand and purchasers where they can save money. That process leads to urban renewal, gentrification of tired, but well located streets and relocation of industry and services.The best that the government can do is get out of the way and let prices tell entrepreneurs where there are opportunities. Whilst government does still control the supply of land and much of the housing supply, it should be working in a predictable way to get that land and housing into private hands, freeing resources for higher priorities as dictated by the market.In all markets, instead of pulling on the leavers of supply and demand, thus confounding the market with uncertainties, the best guide for policy is to reduce transaction costs, increase liquidity and foster price discovery.Hong Kong is a small and open economy heavily influenced by external factors such as rising US interest rate and China’s changing economic fortunes. The markets that can best respond to those changes will not be those where planners have made the best plans, but those that are most flexible hence can adapt most quickly.

Bill Stacey

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