Since the end of last year, amid the deterioration of the external economy and internal restructuring of Hong Kong, people's confidence about the future has shaken. With home-buying desire dampened, real estate prices have dropped further. In view of this, recently the SAR government announced some measures to stabilise the market. They include:

These measures have aroused again public concern about the issue of public housing in Hong Kong. Comments received were mixed. We consider the government's decision to suspend construction of HOS flats so as to stabilise property prices suits Hong Kong's overall and long-term interest. First, property prices have fallen for about 10% further this year. As home-buying confidence shrank further amid the deteriorating economy in the second half-year, stabilising the property market would be significant for ensuring social stability and economic recovery, with the property market remaining a major economic pillar in Hong Kong and other new growth spots yet to be formed. Second, statistics show that private and HOS flats available for sale in the coming two years will reach 90,000, with around 50% being HOS flats. If all of them are offered for sale, it would be difficult for the market to absorb. Third, the persistent unhealthy contraction of the property market will gradually bring about structural imbalance in the fiscal position.

Measures to stabilise the property market

In recent years, the SAR government has paid much effort in stabilising the property market, amid changing economic and financial environment. Measures being taken includes freezing land sale, releasing restrictions on sale of pre-completion flats, establishing the mortgage insurance plan, adjusting the supply of HOS flats, creating home ownership loans for low-income households, modifying the land supply mechanism and etc. These measures have helped to stabilise property prices and confidence, and have created favourable foundation for the future recovery and healthy development of the property market.

1.   Land supply can better respond to market demand

The modified land supply mechanism for private real estate has become more responsive to market demand, favourable for stabilising property prices. This year, most of the land expected to be sold is no longer arranged for sale according to a strict schedule as before. Instead, the sites have been put on a reserve list, pending for developers' application before offering for sale. This can prevent mismatch between supply and demand.

2.   Demand and supply to become more balanced

In the short-term, although supply of private residential flats will still be abundant, the peak supply period has already passed. In the past two years, sites allocated have been drastically reduced. This year, most of the sites ready for sale have been included in the reserve list, instead of directly offering for sale. Therefore, the number of private residential flats ready for sale after 2002 is expected to decline constantly. Supply of HOS flats will also decrease substantially. The supply of HOS flats committed by the government (not to exceed 9,000 units) has been substantially reduced by 60%. Supply and demand in the property market will gradually resume balance in the medium to long term.

3.   The property market operates more flexibly

In recent years, the SAR government has gradually removed or largely released restrictions on the property market, such as abolishing the restriction on the transfer of pre-completion flats, raising the share of units available for internal sale to 30%, extend the period for sale of pre-completion flats to 20 months and etc. These measures enable developers and home-buyers more flexibility to adjust their strategies according to the market situation, and hence can strengthen the adjustment mechanism of the property market.

4.   Home-buying capability has increased

Currently, the SAR government provides a total number of 22,000 home purchase loans for low-income households (excluding the additional quota announced on September 3) via different organisations. Through the Mortgage Corporation, the home-buyer's loan ratio can be raised from 70% to 85%, relieving their down-payment burden. Together with the substantial decline of property prices and mortgage interest rates, the ratio of monthly repayment to median household income has dropped by 70% from 150% at the peak to the current 40%, the lowest since the 1980s.

Outlook still Positive

Although property prices have dropped to level affordable by general households (with monthly income around $ 20,000), demand remains weak. This is attributable to the economic downturn that hit the confidence of the salaried class. The terrorist attack has brought about further uncertainties to the U.S. as well as global economy. Home-buying confidence in Hong Kong has been further dampened, for fear of further decline in property prices. Also, some Hong Kong people compare property prices in Hong Kong with those in Shenzhen and Guangzhou, discovering that prices in northern New Territories still double those for flats of the highest quality in Shenzhen. Hence, they shift their purchase targets to the Pearl River Delta.

In our opinion, although Hong Kong's property market is expected to remain sluggish for a period of time, its long-term foundation is solid and its outlook remains positive. Reasons include:

1.   Rapid population growth will generate high potential demand

According to the medium range forecast of population growth, the average annual growth of population in Hong Kong will be 120,000 by 2006. Taking the present average number of persons per household of 3.3, each year 36,000 residential units would be needed (cannot be regarded as effective demand, but as conditions permit, potential demand will become effective demand). Besides, the desire to improve residential conditions in Hong Kong has long been strong. Therefore, demand for switching to better units is huge. The instability of the property market in recent years has suppressed people's desire to switch flats, but such demand has not vanished and will emerge again once the outlook becomes promising.

2.   Hong Kong's economic transformation has not yet made satisfactory progress, but prospects are cautiously optimistic. Compared to adjacent regions, Hong Kong still maintains advantages in location, capital, talents, economic system and etc. After exploration in recent years, Hong Kong's future development strategy has become clear. Hong Kong is to accelerate its economic integration with the Pearl River Delta, strengthen the foundation of traditional sectors, transform to a knowledge-based economy, develop as the region's primary financial, trading, tourist, information, modern logistics, information technology application centre, as well as the primary location for regional headquarters of primary multinational companies and one of the main operating base for Mainland enterprises.

As Hong Kong's economic integration with the Pearl River Delta progresses, its property prices in the short-term will continue to be affected by the low prices in the region. In the long-term, however, Hong Kong's property prices should be able to maintain a substantial premium, with its status as the regional financial service centre that attracts a host of talents and its advantageous economic system.

Public Housing Policy Adjustment

Although the outlook for Hong Kong's property market remains positive, further rational adjustment of public housing policy by the government is necessary in order to bring about even better effects.

The foundation and operational framework of Hong Kong's current public housing policy was set during British rule. Its background and rationale included the intention to cool down the over-heated market and to assist low-income households to buy flats, and therefore had its own merits. Nevertheless, the public housing organisational structure has become more and more inflated and complicated, and even more welfare-oriented during the years before the return of sovereignty, gradually departing from the principle of only assisting the low-income households to solve basic dwelling needs.

Concerning HOS flats, the number of sold government subsidised flats of various types exceeded 360,000 by the end of last year, representing 18% of the residential flats in Hong Kong (including public rental housing, HOS flats and private flats). There are various types of HOS flats at present, including those provided by the Housing Authority and private constructors under Private Participation Scheme, units under Tenants Purchase Scheme and Buy or Rent Option Scheme, and other redeveloped units. Besides, the Housing Society offers flats under Flat-for-Sale Scheme and Sandwich Class Housing Scheme (currently suspended). The Housing Authority also provides interest-free Home Purchase Loans for low-income households and single persons, whereas the Housing society is the agent for the government's Home-Starter Loan Scheme. Application procedures are not simple, including the white and green form, etc. The overall complicated operation as well as duplicated structure has pushed up operating costs. On the other hand, while land allocated for HOS has been increasing, quality of flats has been rising, as indicated by the location of sites, floor areas and construction materials utilised. Income ceiling for eligible households has also been lifted substantially. In recent years, prices of private residential flats have declined significantly and quite a number of these flats have become affordable by many households eligible for HOS flats. Therefore, overlapping becomes more and more serious between home ownership market and the private market. Due to the need to maintain huge expenditure for rental housing, the Housing Authority has gradually become a profit-oriented housing supplier, departing from its original role.

As for public rental housing, it has become excessively welfare-oriented. After many years' development, the number of public rental units owned by the government reached 680,000 at the end of last year, representing 33% of the residential flats in Hong Kong. They provide welfare housing for 40% of the population, which is the highest among the market economies in the world. Government expenditure for housing in the current fiscal year reaches $ 43 billion, representing 15% of public expenditure. If such a public housing system continues, one day it would exceed Hong Kong's fiscal capability, and would also restrain the development of other projects better suit Hong Kong's long-term interests.

Amid the current economic downturn, Hong Kong needs to balance its economic growth and fiscal health. Strictly controlling the government's burden in housing expenditure is the core measure to cap welfare expenditure. This also calls for restoring private housing's majority share in the overall housing composition, providing low-rent public housing only for those households with difficulties in earning a living.

Moreover, in view of the overlapping and swollen housing management structure, we support the government's decision to conduct a comprehensive review and adjustment of the structure. The existing structure is complicated, with the Housing Bureau responsible for housing policy, the Planning and Lands Bureau responsible for allocation of land as well as the Housing Authority responsible for planning and construction of home ownership flats and public rental units, being independent of each other. This has led to mismatch between housing policy and the operational level. For example, the Housing Authority is independent of the government administration and the land for development of its home ownership units, which has direct impact on the property market, is not included in the government's land sale plan. This has been a major factor of the frequent mismatch between housing demand and supply in Hong Kong.

We look forward to the government's adjustment of the public housing policy and structure basing on the market principle and taking into consideration the changes in Hong Kong's economy, financial market and property market, thereby rebuilding a healthy public housing and welfare system. This will produce positive impacts on stabilising property prices, restoring people's home-buying confidence and foster overall economic development.

Currently, there are about 200,000 property owners suffering from negative net asset positions in Hong Kong. Demands for establishing the so-called "relief fund" by the government is not compatible with the market principle and is not viable. To help those owners of negative assets, attention should be paid to stabilising the market, adjusting supply and stimulating demand, and hence restore public confidence and the healthy development of the property market. Therefore, what Hong Kong currently needs to do is to strengthen the market mechanism during the consolidation period. We believe that as Hong Kong maintains its comparative advantages and most households still have home-buying desire and capability, with improvement in the economic environment and adjustment of housing policy, people's confidence will be restored gradually and adequate demand for housing can be maintained. The long-term outlook for Hong Kong's property market is still positive.