Whenever something that is essential to everyone becomes expensive, people will complain. Food is one of those, especially in poorer countries. There are very few things, however, that are essential to everyone, yet people will complain both when they are getting too expensive and too cheap.
Real Estate is probably one of those, with good reasons. Homes are important for everyone, so when they get unaffordable, people complain. On the other hand, when home prices get cheap, those people who bought houses at the top of the market will be hurt, and a burst of a real estate bubble almost invariably causes recession and quite possibly a banking crisis, and we have seen the effect of this in the subprime crisis.
So in places where home prices are high, things are bound to be political. We in Hong Kong are used to high home prices (we are used to it, but it doesn’t mean that we can all afford a 700 sq. ft. flat), and we could well expect politicians and pundits discussing these issues enthusiastically, while the government being forced by public opinions to do something with the sky-high home prices, from increasing supply to introduce punitive taxes for speculators. When the market was going down, of course, the government did whatever they thought they could to reverse the trend.
Singapore, another city with high home prices in the private sector (but rather affordable public sector housing) has also introduced tough measures similar to Hong Kong in hope to stop speculations. Australia, which almost topped the annual Demographia survey of home prices (losing only to Hong Kong), has had the housing affordability at the top of voters’ mind in their federal election last year.
China of course, is becoming more and more aggressive in its attempt to stop home prices from going up. Few hours ago I reported the new curbing measures from Beijing which limited the number of homes any family can buy (along with other tough measures). Nation-wide, the central government has announced the 8 rules earlier this year. Property tax is also said to be coming in Shanghai and Chongqing. Premier Wen Jiabao, of course, talked about that as well.
The question is, whether government intervention works.
What government likes to do?
What I discussed above is some of the things these governments do. To summarize and add more detail that I did not mention, I would say that the key themes of government interventions in general are:
1. Increase Supply
Every government likes to talk about that. Hong Kong, Singapore and China certainly talked about that, and pundits always say that supply shortage is the root cause of high home prices in Hong Kong, which is wrong.
2. Build Affordable Housing
Both Hong Kong and China governments have talked about that. Hong Kong government planned to make some 5,000 units for people to rent, and the rental income will be set aside to pay for the down payment. Beijing, for instance, just talked about building 100,000 affordable housing. As for Australia, while I am not sure whether there is something happening on that front, at least it was mentioned in the election.
3. Increase down-payment
China has done that for many times. The latest move requires people to put 60% of the home price as down payment if it is their second purchase. Hong Kong has also put in place similar rules, requirement higher down-payment for more expensive purchases. And so has Singapore.
5. Stop People from buying homes
This is the biggest intervention of all, but China is implementing it (as it is still a quasi-central planner). Hong Kong has also got a milder form of it by excluding real estate investment as an eligible investment in the immigration schemes, although it seems to be almost useless as far as stopping Chinese buyers is concerned.
6. Provide loans to people to buy homes
Hong Kong did that in 1997, but it ended up with the government having loads of bad debts on their own books after the property bubble crashed.
Can they actually work?
Yes, and No.
Increasing supply and build more affordable housing should have some impact in prices. After all, that should be a basic supply-demand problem. But there are two pitfalls to consider. The first one is the construction takes time. In Hong Kong, for instance, a real estate development typically takes at least 3 years to complete (from a raw land to buildings which are ready to be sold). So by taking action now to providing more land, what it really means is to increase supply 3 years later. What if the property bubble burst? The supply will hit the market when the market crashes. We also have to think about the amount to new supply relative to the total housing stock. In places like Hong Kong where people are actually quite sufficiently housed, doubling annual supply is not a very significant increase compared with the total stock. In that case, there are good reasons to question the effectiveness of increasing supply in hope to curb home prices.
Increasing down-payment should work, and it is also desirable from a banking regulation perspective as it will limit the risks banks are taking when lending.
Taxes and buying restrictions are probably the least desirable. Not because they are ineffective in stopping people from speculating. Rather, they seem to be creating all sorts of unintended consequences. In the case of Hong Kong, for instance, the special stamp duty, which discourages people from re-selling flats quickly after purchasing, has been very effective in stopping speculators. The problem was that speculations were not the big part of total transactions, and banning re-selling within a short-time means that the number of people who are selling their flats will decrease over time.
In China, a possible unintended consequence of stopping people from buying home is that, people will start renting instead. Beijing, for instance, has seen a faster rise in rents of late, and such level of activities in the rental market is not usual. The latest measures in Beijing have effectively banned non-registered families who haven’t paid taxes in Beijing over the past 5 years from the market. If they need a place to live, they need to rent.
Here is why higher rents will completely counter government’s good intention. If government’s action has heightened the perceived risks in the property market and lower the demand, buyers should charge a higher risk premium over whatever risk-free rate, thus the capitalisation rate (that is the denominator of a simple real estate valuation formula) should rise. Rent, however, which is the nominator, will rise because of higher rental demand. On the balance, new policies heightened the risks and lower demand in the sales market, but higher rents will support the sales prices.
If you are still not convinced that governments’ actions don’t generally work, look at this chart of 30-year history of Hong Kong Property Market, where I listed some major government housing policies along with a huge price chart.
So should governments and/or central banks do nothing?
Yes, and No.
The Hong Kong Monetary Authority and other governments are absolutely right about increasing down payment requirements, as this will limit the risks taken by the banking sector, avoiding the sort of systemic risks were saw in the subprime crisis.
Unfortunately, when housing become a political issue, politicians always miss the key point. The experience in Hong Kong showed that the politicians who complained high home prices in the bull market are just the same group of people who complained about falling home prices and negative equity during the bear market.
I added central banks to the heading because there is one thing central banks should do: tightening monetary policy. It is simply too obvious that property bubbles in various countries are now fuelled by liquidity which Ben Bernanke denies responsibility. That is the root of the problem. For countries which have their currency pegged with the US dollar, they should ditch the peg. For those which doesn’t have currency peg, they should just tighten monetary policy.
- China: Beijing announced their real estate prices curbing measures
- China Real Estate: Wen Jiabao said the government will continue to curb home prices
- Real Estate: Global Views in 2011
- Real Estate: 30-year History of Hong Kong Property Market in One Chart
- China Real Estate: New Curbing Measures to be implemented in Beijing