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Concern over the property market increased. High prices were pushing the limits of affordability. From 1985 to 1995, the affordability ratio, mortgage repayments against average household income, averaged 58 per cent in Hong Kong, much higher than the 40 to 50 per cent ratio considered by banks to be the maximum advisable level. In Europe and North America, mortgage burdens seldom exceeded 35 per cent of average household income. By mid-1997, residential properties in relatively central locations cost on average HK$7,000 (US$900) per square foot. This put the price of a 500 square foot apartment, the average size of flats in the territory, at about HK$3.5 million. At the prevailing average mortgage rate of 9.50 per cent, the mortgage instalment for borrowing up the 70 per cent limit of the sales price for 20 years amounted to HK$22,800 (US$2,920) per month, compared with the average household income of HK$24,000 (US$3,060) a month. In many cases, purchases only made sense if the purchaser could soon resell at a higher price. The pressing need to solve the problems of the Hong Kong property market was recognised by a number of people. For example, Gordon Wu, chairman of Hopewell Holdings Ltd., another major property and infrastructure developer in Hong Kong, suggested that the root of the property issue in Hong Kong was a shortage of land supply. He proposed the reclamation of 10,700 hectares of land to house 3.6 million people.
Rising property prices raised concerns about their impact on Hong Kong’s economic competitiveness. Property prices and rentals in Hong Kong had gone up to levels that were making it increasingly costly for local as well as overseas companies to do business in the territory. The rental levels of grade-A offices in Hong Kong were very high by world standards. More importantly, the high return from property appreciation had diverted more capital towards the property market and away from other industries, which, some felt, could cripple the long term competitiveness of the economy.
Some concerns were voiced over the banking sector as well. Many local banks reportedly had exceeded the guidelines of the Hong Kong Monetary Authority, which specified that property loans, such as home mortgages or loans to property developers, should account for no more than 40 per cent of the bank’s total loan portfolio (a percentage higher than that found in many other economies).13
The new Chief Executive had focused on the importance of increasing property supply in his 1 July, 1997 address, saying:
| “Housing cost has a strong bearing on the economic vitality of Hong Kong. The crux of the housing problem is inadequate supply, causing prices to soar and creating opportunities for speculators...We will draw up a ten-year housing plan: to speed up reclamation and land formation; extend the mass transit system and infrastructure development; and increase the efficiency of housing production through a comprehensive review of the existing organisation and working procedures. We will substantially increase the production of home ownership flats, actively implement the sale of public rental flats to sitting tenants, and address the needs of the "sandwich class". We will increase overall housing supply at a target of not less than 85,000 flats a year. The aim is to achieve a home ownership rate of 70 per cent in ten years. We will also speed up urban redevelopment, clear all temporary housing areas and cottage areas, re-house the dwellers of bedspace apartments; and reduce the average waiting time for public rental housing to three years.” |
As the 9 October, 1997 date of the Chief Executive’s first policy speech approached, the policy task force set up in March 1997 to look into the housing problem was busy preparing an action plan to be announced in the address. The issue had received a great deal of attention in the press. Some observers had suggested levying a tax on capital gains from properties to curb speculation. Others suggested increasing the supply of public housing for sale at affordable prices. The potential impact of these and other options on the property industry and the economy of Hong Kong as a whole was of major concern to developers, businesses, home-owners, renters, stock market investors, and the SAR Government. Each awaited the Chief Executive’s plan. |
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