Zhou Bajun argues that Hong Kong cannot deal with its over-dependence on the real estate sector simply by building more public housing or increasing land supply - ultimately the best solution lies in developing new pillar industries

Since the current SAR government took office four and a half years ago the Chief Executive and his administrative team have been working very hard to fix the structural problems of Hong Kong's real estate market. On the one hand such efforts include building more public housing to meet the needs of low-income families for residential space, increasing land supply for private housing development, and encouraging developers to build more private homes. On the other, efforts include maintaining financial curbs such as higher sales tax to suppress rampant market speculation by non-local investors, and implementing favorable measures to help permanent Hong Kong residents looking to buy homes for the first time.

Private housing prices in Hong Kong experienced a slight drop between October last year and April this year but have risen again afterward to almost match their historical high. The Global Real Estate Bubble Index published by UBS in September shows Hong Kong's property market bubble index this year stands at 1.52, which is lower than last year but still above the 1.5 borderline. The property price-to-income ratio, on the other hand, has reached 18.5, meaning a full-time worker in the services industry needs to save all their salary for 18.5 years without spending a cent to buy a 60-square-meter private housing unit in an urban area.

Figures released by the Housing Authority show the number of public housing applicants on the waiting list stood at 284,800 in March this year and increased to 288,300 at the end of June. Among them the number of general applicants grew from 150,500 to 153,000; while non-senior single applicants increased from 134,300 to 135,300. The average waiting period for general applicants and senior single applicants is 4.1 years and 2.4 years, respectively, an increase of 0.2 and 0.1 years, respectively. This means the "three-year wait before moving in" promise by the government may prove impossible to keep.

Particularly noteworthy is that public housing applicants aged 30 and younger in proportion to the total have increased from 39 percent in 2014 to 40 percent in 2016. Many of them applied for public housing as soon as they reached 18 years of age even though they were still in school. And those of them who cited "current living space is too small" as the reason to apply increased from 22 percent in 2014 to 29 percent this year. Meanwhile, another worrying sign looms with the median monthly income of general public housing applicants having shrunk to HK$2,500 this year from HK$3,200 in the previous two years, a drop of 22 percent.

It seems the SAR government has done everything it could to "fix" the overheating property market but still cannot "cure" it. There are two main reasons: The government has not done enough to keep outside investors from pushing local housing prices up with wild speculation; or optimize and upgrade industrial structure.

Hong Kong is one of the most open markets in the world, but increased restriction on purchases of private residential properties by outside buyers may seriously damage Hong Kong's free-market reputation. That is why the government must be very careful with such curbs. It also means more efforts are needed to address the housing problem by improving the industry's structure and upgrade market control.

In Hong Kong it is much easier for property prices to rise than fall, because the local economy as a whole and the government's revenue are both highly dependent on the real estate market. The property market accounts, directly or otherwise, for more than half of Hong Kong's GDP and the government's annual revenue. It has been feeding not only multiple giant developers and single-interest groups but also local residents' addiction to speculation as well as the government's dependence on the housing market.

The SAR government tried very hard to tweak the property market during its first term in office but did not build up new growth engines to keep the economy running when the real estate market was devastated by the Asian financial storm later on. The property market crash hit Hong Kong's economy so hard the government had a serious fiscal deficit for years as a result. In the second and third term the SAR government was reluctant to push for an economic transformation (restructuring) and shelved plans to build subsidized housing while reducing land supply for private residential development, leaving the market to deteriorate even further.

All these facts highlight the need for concrete steps to add growth engines while restructuring the industrial mix, so that neither the economy nor fiscal balance will be so vulnerable to property market whims in the future. President Xi Jinping told Chief Executive Leung Chun-ying at a meeting in Lima, Peru, during the 2016 APEC Summit last month that the central government authorities hope the SAR government will focus on implementing "comprehensive policies". It's a timely reminder to Hong Kong that increasing land supply for housing development and building more public housing alone cannot end its over-dependence on the property market for economic growth. It must develop new pillar industries whatever that takes.

(HK Edition 12/07/2016 page9)