Hong Kong is a small open economy with a big “basic sector”, which earns foreign exchange from outsiders so we can import all that we need for our consumption and for supporting our basic sector. All other activities are “nonbasic”. The nonbasic sector includes government services, schools, hospitals, entertainment, retail, restaurants, transportation services, and delivery services.
The distinction between the basic sector and the nonbasic sector is conceptual and is useful for analytical purposes, but there are some entities, like restaurants and hotels, that serve both foreigners and locals.
When the basic sector is doing well, those who are directly involved will benefit and earn big profits and incomes. Real estate happens to serve as an important transmission mechanism through which money earned from the outside can circulate internally. Up till now this year, our external sector has been doing well, but our nonbasic sector is struggling. One factor behind this is our lackluster real estate market and, until quite recently, our stock market. The effect of declining wealth has a strong impact on consumption. But there is an additional effect that is more direct. That is the lack of interest in home buying and a preference for investing overseas rather than in Hong Kong. This injects money into overseas economies at the expense of the local economy.
Investing in real estate requires a lot of money, and construction requires a lot of domestic value-added. Both people working in the basic sector and those working in the nonbasic sector need housing. Because home purchases and other real estate investments need a substantial amount of money, its circulation in the local economy will lift the incomes of many people and even the coffers of the government.
Today, some 98 percent of our business units are small and medium-sized enterprises (SMEs). SMEs typically have difficulty borrowing from banks unless they can provide collateral or enjoy loan guarantees from the government. Homes are a ready asset to serve as collateral. With home prices falling, the credit squeeze has become apparent, and bankruptcies jumped in the first half of this year.
Since the announcement of a package of policies aimed at stimulating the economy by the People’s Bank of China, the National Administration of Financial Regulation, and China Securities Regulatory Commission on Sept 24, major cities on the Chinese mainland have basically scrapped all home-purchase restrictions. Homebuyers acted promptly. Stock markets both on the mainland and in Hong Kong surged. Neither the mainland nor Hong Kong limits investment-oriented purchases nowadays. This is very important for the housing markets to return to health. In general, we need a freely running housing market with all the necessary regulatory measures for the protection of buyers’ interests and particularly for building safety. Unless there is a severe shortage, we should welcome investment in homes. After all, every home purchase is a vote of confidence in the economy.
However, I have long insisted that public housing should be for the living and not for profit. Even though the Home Ownership Scheme (HOS) — which initially required the buyer to have repaid all owed land premiums to the government before resale — has held down transactions, it screened out profit-seekers. The original design had the benefit of attracting only those buyers who sought nothing but a home. Since the Housing Authority changed the rules and allowed HOS homebuyers to resell their units to Green Form applicants, the profit motive was ignited, and there were reports of buyers reselling before moving in so as to reap handsome profits. The significant discounts on HOS prices and the opportunity to profit from them have rendered HOS applications into a lottery draw for huge profit, preempting those who genuinely need a home.
While subsidized flats should not be for profit, private flats, including HOS flats with fully repaid land premiums, can be sold for profit. After all, if the economy is going well, appreciation of home prices is expected. However, I would prefer that pure speculation be confined to a housing price futures market.
I first made the proposal in 1991 in the Hong Kong Center for Economic Research Letters. I argued that Housing Price Index futures contracts can be traded much like the Hang Seng Index futures. I have been disappointed that the proposal has been ignored even though I communicated with Hong Kong Exchange and Clearing Ltd twice to promote the idea. Some background: Nowadays, futures based on the Case-Shiller index are traded on the Chicago Mercantile Exchange. From Wikipedia, I learned that “in 1991, while Allan Weiss (American financial analyst) was in graduate school, he formed an informal working relationship with Robert Shiller. Weiss proposed to Karl Case and Shiller (both American economists) to form a company, Case Shiller Weiss, to produce the index periodically with the intent of selling the information to the markets. The fintech giant Fiserv bought Case Shiller Weiss in 2002 and, together with Standard & Poor’s, developed tradable indexes based on the data for the markets which are now commonly called the Case-Shiller index.”
Hong Kong is a top international financial center. We should be ready to launch new financial products that will serve the community. The major benefit from a housing price index futures market is that speculators can save transaction costs and will not need to compete with those who are just seeking a home.
The author is an adjunct research professor at the Pan Sutong Shanghai-Hong Kong Economic Policy Research Institute and Economics Department, Lingnan University.
The views do not necessarily reflect those of China Daily.
