Possible measures to cool the property market

Rising property prices have grabbed a reasonable amount of headline space in recent months. Yesterday's land auction where Sun Hung Kai bid HK$3.37 billion for a residential site suggest that developers expect prices to, at least, remain firm.

Property price levels have prompted calls from political parties to "do something" to curb speculation, to make housing more affordable and to spend more tax payer money providing even more heavily subsidised properties to lower ad middle income groups.

These calls are misguided. Tom Holland's Monitor collum in this morning's SCMP carried a very succinct rebuttal of the suggestion that there is a bubble in the property market. The key points:

1. the Centa-city property index is still below 80 (compared to a high of above 100 in 1997);

2. bank mortgage lending rose only 3% in the first nine months of last year;

3. confirmor transactions represent only just over 2% of total market transactions (which is below average by historical standards);

4. the housing affordability index remains at around 80 (compared to a 1997 market peak of around 170). The ultra low interest rates (less than 1%) are a significant contributor to the affordability numbers.

The one contrary indicator is the low rental yields - which has to be taken in the context of comparable yields on other investments and the cost of funds.

While there is certainly a high degree of froth at the top end of the market, the bulk of the market by volume of transactions/units shows few (if any) of the characteristics of a bubble. Even if there is a bubble, the 30% deposit requirement substantially reduces the risks created by a bubble - as was demonstrated the very low level of bad debt write offs during the Asian crisis. Calls to take steps to reign in prices are misplaced.

That said, some increase in the supply of land to the private to prevent a bubble forming would, in my view, be welcome - especially if the additional supply is designated for mass market/low income housing. It is much preferable for housing needs to be supplied by the private sector rather than being funded by the taxpayer.

The other proposal being looked at is to increase the stamp duty rate for properties over HK$20million to 4.5% (from 3.75%). I oppose this. The government does not need additional revenue and costs measures risk distorting the market. If measures to cool the market are required, they should be in the form of additional supply or increasing the deposit requirement for the more expensive properties.