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Out of control

INTERFERING with the market is something unorthodox in Hong Kong, but there are times when tough action has to be taken in order to rescue it. The government's heavy-handed intervention in the stock market in 1998 to fight back international speculators was a case in point. When property prices zoom up while wages lag behind — making it almost impossible for ordinary citizens to aspire to home ownership even at the lower end — the government has a big problem on its hands.

Even the financial secretary admits that the risk of an asset bubble is looming large, with prices well above what the economic fundamentals support; hence his further measures last month to halt property speculation. Just relying on the market to correct itself, as "do-nothing" free-market dogmatists insist, is turning a blind eye to an economic and political crisis.

The final crunch may not have arrived yet, and any strategy to combat it must be multipronged. But if external buying is proven to be driving a property market as unrestrained as a wild horse, then imposing some form of restriction on non-resident buyers or a capital gains tax on them, as in some market economies, should not be dismissed as an option.

An open, small economy like Hong Kong's — with our currency pegged to the US dollar depriving us of any meaningful monetary policy — has its vulnerable points. In this era of global mobility of capital and money flows, with Hong Kong integrating further into the mainland, we have a free market navigating in totally different waters.

The current, low-interest-rate environment in a sense encourages subprime-like, vicious cycles. The new rich and up-and-coming middle classes on the mainland have every economic incentive to buy into Hong Kong properties and, with just a very small percentage doing so, the city will head for either booms or asset bubbles. The risk now is that the latter seems more likely.

A severe property collapse would cause financial turbulence and erode local confidence. Who can forget the scary scenes of negative equity just a decade ago, when property prices plummeted by some 70%. But neither is the escalation of property prices a welcome sign. It fuels the growing discontent over the cost of housing. It also makes another property crisis all the more likely because of overheating.

Some economists have long called for a different growth strategy — to replace this addiction to a property boom driven by external factors, which gives the illusion of prosperity. International management guru Kenichi Ohmae recently warned that Hong Kong is facing two crises — a property bubble bursting on the mainland and the sudden departure of mainland money.

Some see restrictions on external buyers as discrimination against our mainland compatriots. But if Hong Kong's stability, as China's foremost global city, is harmed economically and socially by the undue rush of mainland investment and speculative money into its property market, what good does it do the general interest of the nation?

Market prices are determined by supply and demand. The government can do more to increase land supply for small and medium-sized residential properties. The present land applications system should be accompanied by a proactive land auction scheme.

However, residential land is still limited because of environmental, town planning and fiscal reasons. Besides, with the city in this highly speculative mood, whatever amount of extra land is supplied could easily be swallowed without pushing prices down.

A demand-side strategy calls for distinguishing between external and local buyers. Satisfying local demands for affordable home ownership should be the priority of any responsive government. If the "free" market has failed to meet such housing needs, then the government has to intervene by providing lower-cost flats for ownership. Hong Kong did it once before, through the Home Ownership Scheme. The special circumstances of the property collapse of the early 2000s made it necessary to scrap the scheme then. In a similar vein, with the situation now changed drastically, there is good reason to revive it in some form, to assist modest-income families not eligible for public rental housing.

Some suggest the government should provide cheap loans or subsidies to help people buy private flats. The downside of this is that it might cause a further boost to property prices, and more speculation. — South CHina Morning Post

Anthony Cheung Bing-leung is an executive councillor and founder of SynergyNet, a policy think tank.
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