International Articles: The Impact of Supply of Subsidized Sale Flats on Private Housing Prices in Hong Kong
Hui, Eddie Chi-man, Wong, Joe Tak-yun, Journal of Real Estate Literature
This paper investigates the impact of supply of subsidized sale flats on private housing prices in Hong Kong, and their cause-and-effect relationships. Using quarterly data for 1978-2003, the results show that private property prices move independently of the supply of subsidized sale flats and that such supply does not "Granger cause" private housing prices. The study also found evidence that the cessation has not restored the market or resulted in any increase in housing prices. The demand or prices in the private sector is not influenced by the implementation of the moratorium nor does the production and sale of subsidized sale flats pose a direct threat to the private sector in Hong Kong. Finally, the regression analysis shows that the stock of private domestic accommodation, transaction volume of private residential flats, household income, and unemployment rate are important in explaining property market behavior.
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As a consequence of high population density and limited land resources, Hong Kong's property prices dramatically increased in the pro-1997 period. In July 1997, in an attempt to suppress the ever-inflating property prices and to promote home ownership from 50% to 70% in ten years, the then Government of the Hong Kong Special Administrative Region (HKSAR), People's Republic of China (PRC) announced the aggressive plan of building 85,000 housing units per year, of which 50,000 would be public housing units. Prior to 1997, the supply of housing units, both public and private, was not more than 50,000 a year. The large amount of government land released by the HKSAR administration in the fall of 1997 completely reversed the cutback in the annual land supply of 50 hectares embedded in the 1984 Sino-British Joint Declaration.
"Unforeseen" consequences soon followed. Private housing prices dropped by 40% within one year of the announcement of the 85,000-unit policy and by some 65% by the third quarter of 2003 from the 1997 peak. The property market slump caused much difficulty in the economy. There were about 106,000 residential mortgage loans in negative equity with a total value of HK$165 billion at the end June 2003 [Hong Kong Monetary Authority (HKMA), 2003], compared to 65,000 loans amounting to HK$127 billion in 2001(HKMA, 2001). This represented 22% of all residential mortgage loans and 31% of total mortgage loan value in 2003. Further, there were persistent reductions in government revenues. In 2000, the government received HK$15.8 billion through land disposal. However, in 2001 it received only HK$3 billion (HKMA, 2001).
The 85,000-unit policy was just one of the more visible components of the overall public housing program in recent years. Other initiatives included the selling of Housing Authority rental flats to sitting tenants and the cessation of production and sale of the Home Ownership Scheme/Private Sector Participation Scheme (HOS/ PSPS) flats between September 24, 2001 and June 30, 2002, and indefinitely from 2003 onwards. Housing Authority members agreed that such measures had to be in place to avoid an overlap between HOS/PSPS and the private property market. In his Statement on Housing, the Chief Secretary, Tsang (2001) called for the need for certainty after the moratorium. He argued that would-be property owners would no longer face additional downward price pressure from an over-supply of new HOS/ PSPS flats. Clearly, the implementation of the moratorium was intended to stabilize residential property prices by limiting the public sector supply. While the government made appropriate adjustments in line with public opinion by implementing the moratorium, it apparently ignored the housing needs of the lower-income classes.
There might be no correlation or causality between supply of HOS/PSPS flats and private residential prices, yet this still needs to be confirmed by statistical tests. The association or relationships were not known before the study, which was specifically designed to explore the impact of HOS/PSPS, if any. …