Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

Few bigger challenges loom for Hong Kong's new Chief Executive Carrie Lam than bringing down real-estate prices in the city, the world's least affordable.

Increasing the supply of available land may take time, so she could start with removing property curbs. They've done little to tame soaring prices and in fact have worked to create ever tinier apartments.

Last November, the government did away with a sliding rule on stamp duty, meaning people who weren't first-time home buyers now have to pay 15 percent tax, while foreign purchasers are charged 30 percent. That came on top of already strict buying provisions, including a maximum loan-to-value ratio of 50 percent on properties worth more than HK$10 million ($1.3 million).

And yet, with so much liquidity sloshing around in Hong Kong's banking system and cheap mortgages aplenty, property prices have continued to rise. A rich store of deposits means the city's banks have held off raising interest rates, even as the U.S. Federal Reserve begins to hike. 

Up, Up and Away
Property prices in Hong Kong keep rising despite government curbs
Source: Bloomberg

Buyers from the mainland haven't been put off either, even if they can't use credit cards to pay for real estate any more. Chinese buyers have spent about $3.8 billion on residential plots in the city since January, and have snapped up 57 percent of the total gross floor area sold by the government this year. Mainland firms that have outbid Hong Kong's tycoons in land sales will be a trigger for further hikes when those properties are eventually developed.

Despite rising prices, secondary sale volumes remain thin. Most of the buying is concentrated on new dwellings, with developers doling out generous incentives and discounts to get purchasers in the door. Few can afford to upgrade, and almost no-one wants to pay the higher tax that applies if they're not first-time buyers. According to Denis Ma, head of Hong Kong research at Jones Lang LaSalle Inc., secondary market transactions were down about 60 percent in 2016 from the annual average in the years from 2006 to 2010, before higher stamp duty was introduced.

Dwindling
Secondary market sales have weakened, dragging down overall volumes
Source: JLL, Hong Kong Land Registry
Note: Data measures the number of ASPs, or agreements for sale and purchase. A single ASP can include multiple properties.

In Hong Kong, external events are typically the catalyst for falling property prices, be it the 1997 Asian financial crisis or 2003's severe acute respiratory syndrome outbreak. Curbs clearly aren't helping to inject some sanity back into the market, and should be dropped. A better focus would be on the nub of the problem, which is meeting demand.

While simply finding more land to sell isn't easy, there could be increased efforts to rezone industrial and agricultural land, or more of a push to work with stakeholders on politically palatable harbor reclamation projects while keeping the city's much-loved country parks intact. Entire families forking out $30 million to secure 11 apartments at just one development show Lam needs to put real estate reform high on her agenda.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net