Saturday, September 18, 2010

How not to cool an over heated market

The Hong Kong government has been considering ways in which to address the growing sandwich class - the group of middle class people whose incomes are too high to qualify for public housing programmes but who are struggling to save a a deposit to buy a home without assistance.

Most of the ideas which have been put forward for discussion are either silly or morally inappropriate. They also demonstrate that a lot of people (including sections of the media) have learned absolutely nothing from America's housing problems.

it all comes down to supply and demand. If you want to make housing more affordable, you either need to increase the supply or reduce the demand. Many of the proposals focus on providing people with either a taxpayer funded subsidised entry to the housing market (e.g. a first home buyer grant) or some other form of financial assistance (e.g. buy to rent programmes). There are two major issues with these proposals.

The first is that they represent a transfer of wealth from an already very narrow tax base to an already too large pool of people who take support from that very narrow tax base. While there is a legitimate case for providing support to people who cannot afford housing at all, there is no legitimate case for the taxpayer to be required to upgrade the financial position of people who are able to support themselves.

The second issue is that these forms of financial support have the effect of increasing demand. You don't need an advanced degree in economics to understand that increasing demand is likely to put upward pressure on property prices making the situation even worse.

If the government does introduce a buy to let scheme or a first home buyer grant, I suspect I would not be the only investor who would consider buying some of the properties in the target price range (HK$2-3 million) in anticipation that the increased demand would lift prices. After all, I might as well get some benefit from how the government spends my tax dollars.

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