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Land Sale: the Success Key
Recently, more and more people have complained that they cannot afford to buy apartment, so they are forced to rent.
‘‘Indeed, the government may intervene and help to develop a healthier market by providing a steady supply of development sites and resuming regular land auctions especially for the smaller plots of land. In addition, the government may improve the transparency of the land application system by disclosing the unsuccessful bids for sites. Given such pricing benchmark, developers also can adjust their offers and the market would ultimately see more successful land sale triggers.’’
One couple, whom are professional lawyer and doctor, made such complaint to one radio programme, arousing wide attention in the city. Some critics suggest that the government should intervene more in order to cool the market, such as building more residential units. But some strongly disagree and argue that this may affect the market as a whole. So, what is the right solution for achieving a stabilised and healthy property market?
According to Jones Lang LaSalle, one solution is a more regular land auction schedule combined with a more transparent bidding system.
The recent rebound in the residential property market has seen mass and luxury property prices rise 22% and 32% respectively since the dip in the fourth quarter of 2008 during the financial crisis. Market now focuses on the questions as to whether a bubble has created, the market is overheated and whether intervention is required. Different indicators including sub-sale activities, stock turnover level and current affordability can shed better light over the recent controversies.
Bubbles in the property market?
The current sub-sale activities ratio, i.e. the number of sub-sale activities over the total number of residential sales and purchase activities, is standing at 2%. Compared to the high sub-sale levels of 10-20% once registered in 1997 and 5% during the post-SARS period in 2004/05, the market is much less speculative now. This low sub-sale ratio shows that people buy properties for self-occupation or for long-term investment rather than engaging in the speculative activities which may result in bubbles in the market.
A similar trend has been recorded in stock turnover. If we examine how much private residential stock is transacted in a year, we can find that the numbers will probably reach approximately 12% this year. Compared to the level of 14- 18% in 1996/97 when the market was hot with high level of speculative activities, the current stock turnover ratio is very healthy indeed.
| |
1996/97 |
2004/05 |
2009 |
| Sub-sale Activities |
10-20% |
2-5% |
<--2% |
| Stock Turnover Ratio |
14-18% |
10-12% |
~12%(*) |
| Affordability |
~90% |
~45% |
~40% |
(*) estimated number
Conversely, the affordability ratio is another essential indicator to show whether residential prices are reasonable or not. The current affordability ratio is only 40%, which is relatively healthy compared to the peak period in 1997 when the ratio was over 90%, yet below the 45%-level recently achieved in the post-SARS period of 2004/05.
Joseph Tsang, International Director and Head of Residential, Jones Lang LaSalle, said, “The current affordability ratio is in fact rather healthy. This means that the real burden for mortgage is within a reasonable range. And even if interest rates increase gradually, which is not likely to happen until the second half of 2010, there will unlikely be heavy pressure on immediate price adjustment,”
He continued, “With all the key ratios remaining at a healthy level, the diagnosis that we are having a property market bubble is not exactly valid. The market upsurge should be seen as part of a natural recovery cycle rather than an unhealthy, overheated expansion. The upward pressure on property prices is partly because of the tight supply in development sites, leading to a decreasing number of new completions in recent years. Low interest rate and the flood in global liquidity also help enhance investment demand and property price.”
Government intervention – a boost or strike?
Now, the market has different opinions on how to stabilise the market. The authority just announced that loans on properties valued at 20 million Hong Kong dollars or above would be capped at 60 percent, down from 70%. This may preclude restrict potential up-graders from trading upward for larger homes as they need to pay more for down payment. Frictions in the “demand chain” may be resulted - as potential up-graders become trapped in their current medium sized units, stock for such units available in the secondary market will be reduced, pushing prices in mass and medium segments even higher. In this way, imposing such new loan ratio to more expensive properties would not affect other sectors in the market.
Some people also demand for government intervention through re-launching of the Home Ownership Scheme (HOS). Nevertheless, such scheme will not suit the needs of middle-class income groups who would not be eligible in view of the strict application criteria. Other suggestions include adding more restrictive terms in lease conditions to control the supply of units and restricting home buyers for new flats to Hong Kong residents only.
However, all these suggestions would give rise to a “controlled market”, interrupting the “market-driven” mechanism, which is definitely not in line with the Hong Kong’s non-intervention policy.
In fact, more effective solutions are available to help adjust the market, and this should be done in the upper stream.
Joseph Tsang said, “Indeed, the government may intervene and help develop a healthier market by providing a steady supply of development sites and resuming regular land auctions especially for the smaller plots of land. In addition, the government may improve the transparency of the land application system by disclosing the unsuccessful bids for sites. Given such pricing benchmark, developers also can adjust their offers and the market would ultimately see more successful land sale triggers.”
He concluded, “We believe that the market should stick to a ‘market-driven’ mechanism and sales prices of residential units should be determined by market demand. Government intervention is a less preferred option. However, the government should try to adjust their land supply policy so as to achieve a more efficient and transparent property market as it is crucial for Hong Kong’s long-term economic success. Excessive government intervention will affect Hong Kong’s position as one of the world’s freest economies adversely, but a fairer and more efficient property market will undoubtedly improve the local investment environment in the long term.”
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