The fiscal reserve overly relies on land sales income, and the government's housing measures firstly to ensure market stability.
There are transactions with price cuts in the market from time to time. The Hong Kong property market is affected by four forces from a macro perspective. Land finance is the strongest. In the last fiscal year, the land price income was as high as HKD141.6 billion, accounting for a quarter of the fiscal reserve, and it did not include other real estate-related taxes. The vast income and Hong Kong people's wealth added brought by the real estate make the government subject to invisible constraints when it formulated the property market policy. Besides, the continued shortage of land supply puts the government into the situation of "One can't make bricks without straw," even it intents to suppress high property prices. Experts analyze that the property market falls under the epidemic, but the government would not rashly to let the situation stay because of its role in promoting the economy.
Journalist Ngan LunLok
The land sales income accounts for a quarter of the fiscal reserve. The down market has an enormous financial impact.
Although the income from land sales in Hong Kong is non-operating income other than taxes, it has gradually become an essential source of funding for government expenditures in recent years. According to government information, the average proportion of land revenue in government revenue has soared from 8% between 2000 and 2005 to 21% between 2015 and 2020, making it the second-largest source of income for fiscal reserve. The financial surplus having a significant deviation from the prediction in some years is also because of the "unexpected wealth" brought by the income from land sales.
According to the latest financial budget, the overall fiscal income in 2019/20 reached HKD567.3 billion, a yearly decrease of 5.4%. But the land sales income among did not fall but rose sharply by 22% yearly, leading its proportion increase to 25%, equivalent to a quarter of the fiscal income, and it became the most significant fiscal income. Looking forward to this fiscal year (2020/21), the government expects that the fiscal deficit would exceed HKD280 billion affected by the epidemic. A stabilized land premium income will inevitably become one of the government's options for deficit reduction.
According to the government's forecast at the beginning of the year, the fiscal reserve is expected to reach HKD572.5 billion this year, of which land sales income is still estimated to be HKD118 billion, accounting for more than 20% of the annual revenue. The land sales income is still above HKD100 billion under a weak economy because the government has announced to launch many valuable land sites in this year. The industry believes it is a reflection that the government does not want the land sales income to decrease and impact the fiscal reserve.
It restricts the policy development in the property market.
Land sales income is like a double-edged sword to the Hong Kong government. The property market will significantly increase the fiscal surplus when it is booming, but it will quickly expand the fiscal deficit when the property market is in a downtrend. Cheong Shing-Dium, the Executive Director and Director of Corporate Development (valuation and property management), expresses that the land sales income can be helpful in the problem of the narrow tax base in Hong Kong. Still, a single income accounting too high of government's revenue is not healthy. Poon Wing Cheung, the Senior Lecturer of Architectural Technology Department of City University, points out that the proportion of land sales income is too high, which will cause certain restrictions when the government formulates housing policies.
The sudden increase in the government's recurrent expenditure in recent years has made it impossible for the government to rely on the income generated by high land prices. According to the government's information, the recurrent expenditure has risen from HKD150 billion to HKD440 billion in the previous year since the return of Hong Kong to China. And it even is expected to be close to HKD500 billion this year. The government has to handle the rise and fall of the property market under significant recurrent expenditure.
Real estate is the backbone of Hong Kong's economy.
The government wants to stabilize the property market because the land sales income has a huge influence on the fiscal reserve, and a plummet in property prices may also have a severe impact on the Hong Kong economy. According to the analysis, housing is used as Hong Kong people 's wealth and manufacturers' guarantee, and mortgage loans are the primary household debt of Hong Kong people. At present, the household debt has reached a record high of 80.4% of GDP, second only to South Korea 's 93.9%, becoming the second-highest in Asia and is related to the safety of the banking system. The government is cautious about the property market due to the existence of this series of industrial chains, and high property prices have become an inevitable historical burden.
A government report in April last year pointed out that Hong Kong 's narrow income base has always been a topic of social concern, and it admits that Hong Kong has relied heavily on real estate-related income in recent years. According to the information, besides land sales income, the proportion of stamp duty income due to a series of strict measures is also increasing. The relevant income in 2017/18 accounted for 5.4% of government revenue. The government also believes that the proportion is unexpectedly high.
Over half of families purchase their houses by themselves.
Besides, according to the government's information, Hong Kong had 2,652,500 households as of the end of 2019. And the ratio of homeownership was 50.5%, that is, about 1,339,500 families were living in their own houses. Poon Wing Cheung points out that there are already more than one million homebuyers in Hong Kong. The difficulty of the government 's housing policy is not only to meet the public 's demand for homeownership but also to prevent a slump in the property market that affects the asset value of home buyers. He says that the government can only focus on subsidized housing.
Cheong Shing-Dium also believes that Hong Kong is mainly dependent on real estate-related income, which is not ideal because it will aggravate the social disparity between the rich and the poor, causing social dissatisfaction. He believes that the Hong Kong government is unable to launch strict policies on the property market because it considers there would be challenging to balance the impact of citizens' life, livelihood, property, etc. if the housing policy is drastically reformed. However, he believes that the Hong Kong government has changed the practice of small governments in recent years and has actively regulated the property market many times, which may reverse the situation in the long run.
The land supply continues to be short due to the obstructions from people with vested interests.
The Land Supply Task Force estimates that the land demand will not be less than 4,800 hectares in the next 30 years. And it is expected that Hong Kong will still lack at least 1,200 hectares of land in the long term by 2046, taking into account the 3,600 hectares from all development projects that have implemented or planned.
Poon Wing Cheung points out that the problem of inadequate land supply has a long history in Hong Kong, and the land currently owned or planned to be developed only sufficient for the short term needs of the market. The government has to increase land reserve and release land in different upturns and downturns of the property market according to the market needs to stabilize the property market. Having an extensive land bank can also adjust the publics' expectation of buying a home, without worrying about no house in the future, and prevent foreign investors from entering the market excessively.
Land reclamation is difficult.
He takes Singapore as an example. The vast land bank has given the government the ability to launch supply in response to market conditions. Regardless of subsidized housing and private residences, there are more options. The policies introduced will have a regulatory effect on the property market. However, he also reminds the market that Hong Kong's structural problem restricts the decline in the property market. But do not believe the myth that the property market only rises not falls, and no force can stop the property market decline when the market is panic.
Cheong Shing-Dium admits that the land problem in Hong Kong has never been solved because land creation is difficult. It subjects to sociopolitical intensification and involves many consultations. Plus, the time for application and approval procedures is long, leading preparation for land that ready for development needs up to eight or ten years. In recent years, many long-term development plans have also been challenged, such as reclamation and agricultural land requisition, and there are many planning restrictions on the rezoning. He sighs: "The current land supply is hard to achieve."
In recent years, land supply has become a place for political struggle. Many stakeholders have brought resistance to land supply at different levels, for example, political parties, environmental groups, real estate developers, landlords in the New Territories, etc. It seems that the problematic pattern for the government to find land is not easy to change. Cheong Shing-Dium sighs with regret that the problem of insufficient land supply in Hong Kong, which is an international city would affect foreign capital's interest to invest in Hong Kong, and hinder the long-term development.
The government focuses on subsidizing housing, and the private building supplies have fallen behind for the long term.
At the end of 2018, the government announced to adjust the ratio of public to private housing supply from 6:4 to 7:3. The ten-year supply target announced last year was also adjusted accordingly. Among the total housing supply target of 430,000 units, public housing was changed to 301,000 units. The private housing supply target was changed to 129,000. In other words, as the government increases the proportion of subsidized housing, the supply of private housing is also adjusted downwards, which indirectly keeps the supply of private housing at a relatively low level, and plays a specific role in supporting property prices.
Cheong Shing-Dium points out that the government focuses on subsidizing housing, mainly because several users in the market cannot afford high property prices and only can reach the housing target with the help of the government. It is undeniable that the increase in subsidized housing will reduce the supply of private housing. The private house will become another luxury market if we refer to the example of Singapore to increase the subsidized housing market and make all the middle classes invest in the subsidized housing market. It may push up property prices, but it will not affect the housing needs of people.
Poon Wing Cheung believes that the number is far from enough even the government has changed the ratio of subsidized housing to private housing to 7:3. He believes that the ideal should be to achieve 8:2, or even 9:1, then the public will have confidence in the homeownership scheme. But he also understands that the current shortage of land supply makes it difficult to change policies at once. However, he believes that the government must clearly explain the policy and release information to the market that the government is developing more land to substantially increase the proportion of subsidized housing, which can also reduce the market's resistance to increasing land in the long term.
This year's completion is expected to be 13% less than prediction.
Private housing in Hong Kong has long been in a state of backwardness. Going through records, since 2004, the actual completions in the other 14 years except 2017 and 2018 had significantly been lower than the predictions. For example, last year, the private housing completions were only 13,640 units, 33% less than the number initially predicted. The government expects 20,850 units to be completed this year, but the industry predicts that the number of completed units may only reach 18,000, 13% less than the forecast, affected by the epidemic.
Ip Man-Kei, the Land and Housing Research Director of Our Hong Kong Foundation, pointed out earlier that 94% and 93% of the units completed in 2020 and 2021 are expected to be units below 100 square meters. This proportion had increased year by year from 83% in 2015. The actual supply of private buildings is worse if calculated by floor area instead of by the number of units. The vacancy rate of private housing has dropped from 4.3% to 3.7% at the end of last year, which also reflects that market supply has become tighter.
