The Hong Kong property market: where to from here?
How will the path evolve for Hong Kong to provide affordable real estate to millions of families and businesses?
Hong Kong’s property market is in a conundrum. High real estate costs lead to low standard of living and add to business expenses, hurting its competitiveness against cities in the region. Successive administrations since 1997 have been trying to bring the cost of real estate down but to little avail. Now that Hong Kong has embarked on the latter half of the 1997-2047 period under the banner of “one country, two systems”, is Hong Kong in a better position to achieve the aspiration?
First, let’s agree on a few things.
- The provision of real estate is seriously lacking in Hong Kong. We argue that it is not just residential premises that are in short supply. All other real estate types such as offices, retail and industrial are too, not to mention community space. This is mostly because of the fact that Hong Kong has not produced enough new developable land for a long period. There are also statutory and planning constraints to land formation.
- The costs of real estate are high. Short supply in land means that the end products, the real estates, are in short supply too. The supply has been so tight that even when demand was soft, rents and prices did not fall by significant amount. And when demand returns, rents and prices soar. The price and rental trends for commercial and residential properties throughout the pandemic clearly demonstrate this phenomenon.
- Accommodation is mostly sub-standard. For many families and businesses, their accommodations are far less than desirable, or that many are subject to live or operate in highly dense space. Such is the natural economic consequence of high cost of accommodation.
What should the policy goals be? Simply put, make the provision of real estate more affordable. This will sharpen (one of) Hong Kong’s competitive edges, enhance its appeal to foreign talents and businesses, allow easier access to homeownership and raise the standard of living for those in need.
Will a plunge in price and rent do the job? No, because a sharp fall in real estate value will seriously hurt a considerable portion of the population and businesses who are property owners. The resulting negative knock-on effect of the banking system and the economy is unimaginably serious.
A palatable route to a “soft-landing” is a scenario where there are (1) stable rent and price trajectories and (2) persistent income growth over a long period. In other words, let affordability improve over time without serious repercussions.
(1) and (2) are unlikely to happen at the same time because real estate is a derived demand and parameters such as rents and prices are functions of economic performance. If the economy performs well (income growth), chances are rents and prices will follow.
Nonetheless, rents and prices are functions of supply too. If we are able to produce massive enough land for the build-up of real estate provisions, it is possible that sufficient real estate will cap rental and price growth even when the economy performs robustly.
As such, land supply must go on. It is true that the aftermath of social events and COVID since 2019 have caused considerable shrinkage in demand. Indeed, there are pockets of the real estate market that feature exceptionally high vacancies at the moment. However, the unescapable ebbs and flows of economic cycles suggest that demand will return some day. One must not let today’s demand side weaknesses distract the steady flow of land supply. After all, development cycle takes times and it will not coincide perfectly with the demand cycle. The government, as a key supplier of land, must keep feeding the market with development sites at all times.
The effort to step up land supply appears to be in earnest pursuit. The Northern and Harbour Metropolises are huge land creation initiatives in disguise, in our view. We believe they represent the solutions to the land supply bottleneck, though their coming to fruition will be some years away. Challenges will be many – the goal and purpose, design, city planning, infrastructure, environment, finance, engineering, perception by the public, collaboration with neighbouring cities etc. However, in facing the choice between being forever stifled by a lack of developable resources and overcoming the many challenges for better prospects for future generations, the answer seems obvious.