Hong Kong Budget 2011-12: Highlights and Analysis of Housing Policy23 February, 2011, 15:20. Posted by Zarathustra
Tags: Budget, Hong Kong, Inflation, Property, Public Finances, Real Estate
The Financial Secretary John Tsang has just finished his 2011-12 Budget Speech earlier today. Before turning to the housing and related policy, let us look at a few highlights in the budget (which only reflects what I am interested in).
The estimated total government revenue was HK$374.8 bn, and total government expenditure was 303.5 bn. The revenue came in much higher than government’s own forecast thanks to record proceeds from land sales as I mentioned before, and the expenditure was HK$13.7 bn less than government’s forecast. The budget surplus was HK$71.b bn or 4.1% of GDP, while the fiscal reserves increased to $591.6 bn, or 34% of GDP. This is just another reminder that Hong Kong is having the best fiscal position among developed countries.
Following up on yesterday’s inflation figures, the Financial Secretary said “Fighting inflation is our major task this year”. Because of the linked exchange rate system, Hong Kong has no independent monetary policy to speak. The important and indeed a bit funny thing here is that, the government is actually rather passive in fighting inflation even though it is their “major task”. Here I quote:
In the face of surging food prices, we will continue to diversify the sources of our food imports. This year, one of the key policy directions of the Mainland is to contain inflation and manage inflation expectations. Hong Kong will be able to fight inflation more effectively if the Mainland’s inflation is brought under control – Budget Speech
One strategy to “fight inflation” is to introduced inflation-linked bonds, or iBond as they call it. The government is expected to raise some HK$5 to 10 billion of iBonds to help household to maintain purchasing power of their savings. The new bonds will have a maturity of 3 years, and coupon will be paid every six months. Though I am rather sceptical if anybody would be interested in buying this thing at all. For one thing, the total Chinese Yuan (or renminbi) deposits in Hong Kong is now well above 100 billion level, I think most citizens in Hong Kong would prefer buying renminbi over iBond.
The government has also announced a series of relief measures to counter inflation, including subsidy on electricity bills, waving government rates, waiving 2-month rents of public housing, and extra allowance to the recipients of social security. The government will also increase allowance for taxpayers if they have parents and grandparents dependent on them, as well as child allowance.
The government is now forecasting a HK$298 bn operating expenditure for 2011-12 fiscal year, with HK$242 bn of those are recurrent expenditure, while capital expenditure will amount to HK$73.1 bn. Total government revenue is forecasted to be at HK$375 bn. Thus the forecasted budget surplus of the coming year will be HK$3.9 bn, while the fiscal reserves will be at $595.5 bn at the end of the fiscal year.
This must be the key concerns for many people in town. The Financial Secretary has been “mindful of the risk of property bubble” (sure, I know). Despite being completely useless, John Tsang bragged about his achievement of the special stamp duty in the “immediate reduction of speculative activities”. The government continues to be completely wrong about the property bubble. Here I quote:
In the medium to long term, the most effective solution to the problems of the property market lies in the fundamental issue of ensuring steady and adequate land supply. Besides reviewing and releasing sites for housing development as soon as possible, the Steering Committee on Housing Land Supply that I chair has adopted a new mindset to explore in a forward-looking way options for identifying more land resources for future use – Budget Speech
And just as predicted, the government has nothing special to say about cooling down the real estate market. The government pledged to initiate more land sales in addition to relying solely on the land application system, while putting up 5 residential sites earmarked for small and medium- sized flats for sales by tender. Thus the total number of sites available will be 52, enough to provide 16,000 residential units. Together with the MTR projects, Urban Renewal Authority’s projects and other supplies through lease modification, the government now forecast that the total supply of land for the coming year will provide some 30,000 to 40,000 residential units vs. 20,000 as pledged in the Policy Address last year. In addition to supply in the private sector, public housing for rental will be unaffected. The construction pipeline for public rental housing will provide 11,200 and 16,700 units in 2011-12 and 2012-13 respectively. Following up on the My Home Purchase Plan announced in the policy address, which allows eligible citizens to rent the flat first and buy the flat later using part of the rents paid as the first instalment, John Tsang announced that the first project in Tsing Yi will be open for application next year. Besides increasing supply in residential market, the government also want to increase supply of offices, but I shall not go into the detail here.
On the whole, the government are either unaware of the true cause, or they are unwilling to admit the true cause. Inflation and real estate bubble are intimately linked to the linked exchange rate or currency peg system. Following the quantitative easing in the United States, funds flowing into Hong Kong drove up the demand and price of Hong Kong dollar. To maintain the exchange rate, the Hong Kong Monetary Authority had no choice but to increase money supply, which drove down interest rates and drove up inflation. By increasing land supply, the government is not addressing the key of the problem, because construction takes time, and the total housing stock is large enough, which made the pledged increase in annual supply meaningless relative to the total stock.
But people should not believing that home prices can only go up because of the apparent lack of credibility of the Hong Kong government in influencing home prices. The belief that interest rates will stay low for extended period of time is a fallacy, as low interest rates environment in the United States is neither a necessary nor sufficient condition for low interests in Hong Kong. Ultimately, interest rates in Hong Kong are tied to money supply and liquidity, and M1 Money supply has already dropped for two straight months.
At this moment, I am not sure if recent funds outflow is a genuine trend or a blip. I maintain my bull-case scenario of 10-15% rise in home prices in 2011, which means the real estate prices will reach 1997 within this year. However, you should be cautioned that funds flow can be very unpredictable, and reverses quickly. Even though the government can be totally useless in managing home prices, the belief that home prices can only go up is nonsense.