Hong Kong Property: Why Supply-Shortage Hypothesis is Nonsense8 February, 2011, 16:19. Posted by Zarathustra
Tags: Hong Kong, Property, Real Estate
After the failed attempt of curbing home prices by introducing punitive special stamp duty, the Hong Kong government wants to increase land supply to “falsify the expectation that real estate prices can only go up”. The new measures would probably include:
1. Additions of more residential sites in the land application list.
2. Instead of relying only on developers applying for land through the application list, the government will initiate more land auctions.
3. Introducing more restrictions in the land grants, requiring developers to build more small to medium sizes flats for low to middle income families.
In my previous analyses on why Hong Kong property prices would rise (and fall), I have already made my case clear that limited supply is a bit of a myth, as population growth has slowed in the past decades such that it now barely grows, so looking at the average new supply in the past 20 years (which was much higher than now) and concluding that supply is not enough is nonsense.
Another way to understand why supply-shortage hypothesis is nonsense is to look at Hong Kong real estate market like gold market. Real estate, just like gold, are assets which, once produced, were not consumed. Houses and flats, once built, were sold, but not permanently removed from the market. They become the total housing stock.
For commodities like oil, production level would have dramatic effect on prices. As Robert Blumen put it:
For a commodity, increases or decreases in the quantity produced can have a dramatic effect on the price because the quantity consumed must move either up or down along with the quantity produced. Because there are no stockpiles to buffer the difference between production and consumption, the only way for them to come into balance is through price.
On the other hand, for assets like gold and real estate, because they were not consumed and gone after being bought, there should be a huge existing stock of gold and real estate, and most tradings happen when these existing stocks change hands. In the case of gold, as Robert Blumen put it:
Because mine supply is small compared to existing holdings and because the volume traded exceeds mine supply by a large ratio, mine supply is quickly absorbed into the market and has little impact on the gold price.
In the case of Hong Kong property market, according to the latest Hong Kong Yearbook (2009), the total housing in December 2009 consisted of 1,395,900 private sector flats, 393,200 home ownership scheme flats, and 745,400 public housing for rental. To illustrate the first point that most trading happens within the existing housing stocks, the chart below shows that transaction volume in secondary market (i.e. existing housing stocks) has exceeded the primary market (i.e. newly completed units) for most of the time, and indeed secondary market transactions are the majority of the transactions in recent years.
Source: Centaline, Land Registry
The second point is that new supply is small compared to existing housing stocks. For simplicity sake, let me assume that the existing housing stock in the private sector market is about 1.4 million flats. While people are complaining that 10,000 units of new supply per year (which is roughly the number we see in these two years) is not enough, I see no reason why doubling that number to 20,000 units per year would make much difference relative to existing housing stock of 1.4 million flats. By the same logic, if the property market crashes, cutting supply from 10,000 units per year to 0 unit per year will make no difference relative to the total housing stock of about 1.4 million flats.
To hit the problem of high property prices in Hong Kong, the government should stop doing anything, in my view, in tweaking the supply of land, or introducing punitive measures to get rid of speculators. I have repeatedly stressed here that the current Hong Kong property market is liquidity driven, and we should blame loose monetary policy of the United States and China, as well as the currency peg.
(Hat tip to Robert Blumen at Ludwig von Mises Institute)