Blog Articles from former Secretary for Development, Mr Paul Chan - (1/12/2013 - 15/01/2017)

At the end of last month, the current-term Government gave an account of its work regarding land and housing over the last three years in the “Report on the Work of the Current-term Government in its Third Year” and undertook to continue making every effort to increase housing land supply in the short, medium and long-term.

Some may question whether increasing land supply can really solve the housing problem for the community, as property prices have remained high or are even soaring to new heights, despite the Government’s continuous efforts to increase land supply over the last few years. In this connection, I have to point out that the relationship between land supply and housing is similar to that between flour and bread, and the conversion process takes time to produce results. Today I wish to share with you some of my observations on the private residential property market.

1. Housing price indices and property prices
The most commonly referenced housing price indices – including private domestic price indices prepared by the Rating and Valuation Department – only reflect property prices in secondary market transactions and not the situation in the primary market. According to news reports, over the past 20 months concessions, rebates and/or second mortgage loans were often provided by developers when they launched new residential projects for sale. As such, first-hand property prices are not directly reflected in their price lists. In the same way, we cannot make a fair comparison between the first and second-hand property prices simply by comparing their price lists.

2. Overall transaction volume
The overall transaction volumes for residential properties in 2013 and 2014 were 50 700 and 63 800 respectively, which were record lows since 1997 and far lower than the levels during the property market booms of 1997 (172 700) and 2010 (135 800). In fact, the two figures are 20 per cent or even less than those for 2011 and 2012, both of which record over 80 000 transactions per year. Apart from reflecting that overseas buyers and speculative activities have become negligible since the implementation of the two demand-side management measures, what else can we see from the figures? Have members of the public become more cautious in view of the increasing housing supply? Let’s look at some more figures below.

3. Transaction volume of first-hand flats
The proportion of first-hand flat transactions among overall residential flat transactions has been rising since 2011, and it rose to 26 per cent in 2014 – then the highest level since 2005 (15 per cent). In April and May this year it soared even higher, reaching 35 per cent. Apart from the rise in proportion, the transaction volume of first-hand flats has also reached a new high since 2008 of about 16 900 in 2014. While overall flat transactions in 2013 and 2014 were stuck at the lowest level since 1997, the proportion of first-hand flat transactions has been on the rise. So what does this tell us? Does it have anything to do with the developers’ thrust in selling first-hand flats since late 2013? It has been reported that in the past 20 months, developers often provided discounts or rebates in various forms, as much as double-digit at times, to promote the sale of their flats. In fact, according to market data, first-hand flat prices usually have a premium of 15 per cent or more over those of second-hand flats. However, since the third quarter of 2013, the premium has shrunk dramatically to less than 10 per cent, and there were even individual cases of “negative price difference” in the second and fourth quarters last year, i.e. the actual prices of first-hand flats were cheaper than those of second-hand flats. How could this have happened? Is it related to the developers’ outlook for the market’s development? Or the number of properties they have in hand? Or competition among developers? Or the increasing housing supply in future? In fact, developers applied for pre-sale consents involving about 3 100 flats in June this year, which is a record high for the past four years.

4. First-hand flat supply in the short and medium term
As at the end of May this year, the potential first-hand flat supply over the next three to four years was estimated at 81 000 flats, some 25 per cent above the figure of 65 000 made at the end of June 2012, when the current-term Government took office. In addition, by the end of May, another 8 000 flats or so would be provided by a batch of sites for which the procedures of land premium payment had been completed or for which the tender procedures were soon to be completed. It is worth mentioning that such a high level of potential flat supply does not include the number of first-hand flats sold during the period. In other words, while there has been a remarkable increase in the volume of first-hand flat transactions over the past 20 months, the future first-hand flat supply will continue to rise. This is the fruitful result of the Government’s efforts to increase land supply by searching for land comprehensively and initiating land sale actively in the past few years. Of course, the estimated number of potential first-hand flats is subject to future private housing land supply and the sale of flats in the primary market.

5. Number of flats under construction and nearing completion
Apart from the aforementioned potential flat supply, the number of private housing flats under construction and nearing completion is also an important figure of reference for housing supply. For flats under construction, the average annual number over the past three years (2012-2104) stands at some 16 700 flats, representing an increase of about 58 per cent from the level of 10 600 flats over the preceding five years (2007-2011). With more flats being constructed, more flats will be completed. By next year, the number of flat completions will reach some 20 000, about 70 per cent more than the average for the past 10 years. The implication of flat completion on the property market is another point of interest. Completed flats and uncompleted flats are different in terms of their impact on housing supply. Uncompleted flats can satisfy buyers’ ownership desire, but not their imminent housing needs. Completed flats, on the other hand, irrespective of whether buyers are moving into the new flats or renting them out, will bring an immediate and substantive increase of flat supply to the market, as buyers who are switching flats will generally have their original flat sold or rented out. Based on past experience, the completion of any residential project, especially those that are large scale, will have a considerable impact on the property sale and rental market in the same district. As such, when assessing residential flat supply, apart from taking into account the number of first-hand flats, we must not overlook the number of flat completions.

6. Comparison of new housing land supply and first-hand flat take-up
Government-initiated land sale was suspended between 2003 and 2009. During this period, the average number of flats to be provided by new housing land supply each year was 10 400, far fewer than the average first-hand flat transactions of 18 500 flats per year during the same period. During this seven-year period, the housing land supply and first-hand flat take-up saw an overall difference of more than 40 per cent (about 44 per cent, with a shortfall of about 56 700 flats). This reflects, on the one hand, the full absorption of the oversupply of residential flats before 2003 and, on the other hand, that seeds were laid for the problem of housing land supply shortage in the subsequent years. It also explains why the current-term Government has been saying that our efforts to increase housing land supply are aimed at making up the shortfall of the past – to patch up the gap between demand and supply. The situation started to change gradually after 2010 when the Government first introduced the annual private housing land supply target. Since then, the new housing land supplied was capable of providing more flats than the number of first-hand flat transactions each year. From 2010 to 2014, the new private housing land supply had a capacity to provide about 87 600 flats in total, exceeding the 65 500 first-hand flat transactions during the five-year period by over 34 per cent (or 22 000 extra flats). Given these numbers, we can say that the supply-demand imbalance of first-hand residential flats is being gradually improved. Hopefully, with our persistent efforts to increase housing land supply and the yielding of favourable results, the imbalance will be averted progressively.

7. Market competition
To promote market competition, we have, in the past three years, made it easier for small-scale developers to take part in the tendering process by putting up many small to medium-sized sites for sale. Among the 84 residential sites sold in the past three years, only 15 (or about 18 per cent) were awarded to the so-called “Big Four Developers”, according to the information on parent companies shown in the tenders received. Meanwhile, the remaining sites were awarded to more than 40 developers or fund companies of different backgrounds on sole proprietorship or joint venture.

The tendering of railway property development and large-scale Urban Renewal Authority (URA) projects is also competitive. Over the past 18 months, six railway property development projects and one large-scale URA project were awarded to six developers on sole proprietorship or joint venture. Among them, two developers were each awarded two projects, while the remaining three projects were awarded to four different developers.

As can be seen, competition is keen among developers in the private property market. With market share more diverse, the future supply of residential flats increasing and the Government maintaining a steady supply of land, individual developers can hardly dominate the pace and pricing of property sale in the primary market. Bringing in more market competition will provide the public with more choice.

8. Price increase of flats of different sizes
Over the past year or so, the increase in second-hand flat prices has mainly been driven by small-sized flats. As small-sized flats involve a relatively smaller price and banks or mortgage companies offer higher mortgage percentages for such flats, they are more likely to attract first-time buyers. It is worth pondering whether the per-square-foot prices of small-sized flats will soar to such heights that the per-square-foot prices of individual flats in the New Territories will become even more expensive than flats of similar sizes in the urban area. In fact, in 2014 the prices of flats smaller than 40 sq metres and those from 40 to 70 sq metres increased by 15.2 per cent and 14.1 per cent respectively, while the price of flats with areas from 70 to 100 sq metres and above 100 sq metres only increased by 7.7 per cent and 6.4 per cent respectively during the same period.

9. Supply of small and medium-sized flats
Although the increase in prices of small and medium-sized flats far exceeded that of large flats over the past year, small and medium-sized flats will provide a major chunk of the 81 000 potential flat supply in the next three to four years. Among these, flats with a saleable area of under 70 sq metres and those from 70 to 99.9 sq metres will account for about 69 per cent and 18 per cent respectively (representing 70 600 flats or about 87 per cent in total).

Conclusion
As I grew up in sub-divided units in squats and in public rental housing, I can understand the pressure and anxiety felt by the public on the housing issue. Fluctuations in flat prices are subject to many internal and external factors and can hardly be predicted. Nonetheless, to solve Hong Kong’s housing problem at source, the most fundamental way is to increase housing land supply and to accord higher priority in land allocation for Hong Kong residents’ own use during the transitional period of housing land shortage. We are expeditiously taking forward the various plans for the New Development Areas (NDAs) and new town extensions, including the Kwu Tong North/Fanling North NDAs, Tung Chung New Town Extension, Hung Shui Kiu NDA and housing sites in Yuen Long South. These projects are capable of providing over 190 000 public and private residential units with completion in phases from 2023 onwards. In the short to medium term, as we do not have a magic wand, we will continue rezoning suitable sites for housing use to increase housing supply. I hope the public will understand the core of our housing problem and appreciate the overall situation in an objective manner. If some people are not even willing to consider rezoning 1 per cent (about 150 hectares) of Green Belts (not Country Parks) to provide more than 80 000 flats (with more than 70 per cent being public housing), and blindly object to all the Government’s efforts to increase land supply, and even try to delay its progress by legal procedures or other means, then are they doing any good to the community? Or do they have an ulterior motive? If our work on increasing land supply is further hindered by filibusters, the housing problem in Hong Kong will only get worse. The general public will be the victims in the long run. And who will reap the bitter harvest?