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Consumer Council Report on the Residential Property Market
Comments by the Hong Kong Coalition of Service Industries

October 1996

1. The Hong Kong Coalition of Service Industries welcomes the Consumer Council's Report on "How Competitive is the Private Residential Property Market". Private residential property is one of the most important sectors of Hong Kong economy and a study of its competitiveness is indeed timely.

General comments

2. Although the Council's report offers a useful perspective on the subject of private residential property from the point of view of consumers, we would point out that unlike public residential housing, private property is not purely a consumer issue. Rather, there is an investment angle in all private residential property transactions. Indeed, for many purchasers of private residential property, the investment consideration is no less important than the consumer perspective. Bearing this in mind, the Consumer Council's study cannot and should not be the conclusive statement on Hong Kong's private residential market.
3. Most consumers and investors in private residential property prefer new buildings as they often attract better mortgage terms, offer better tradability, and usually with better infrastructural facilities. In seeking to address the issue of supply of residential housing, therefore, there should be an emphasis on providing incentives, or at least removing deterrents, for private developers to develop.

Comments on the Council's Recommendations

Recommendation 1: Lower barriers to entry

4. There is no barrier to entry to the property market in Hong Kong. There is room even for the smallest developers, for example, those building single houses in the New Territories. There have been a considerable number of new local players in the market in recent years
5. Although there do not appear to be many foreign developers, it should be pointed out that property development is normally very localized and most overseas countries have barriers to entry whereas there are no market access barriers for overseas investors in Hong Kong. In fact, there are a number of foreign property developers although the majority of them tend to develop commercial and industrial property instead of enter the residential market.
6. On the matter of lot size, although there may be a case for big lots to be broken up, the lot sizes should not be too small in order that the needs of infrastructure provision could be catered for. Our view is that the minimum lot size should be 20-30,000 square feet. The formation of consortiums could be one answer to the need for bigger lots, as in the example of property development above the new MTR stations. The possibility of heightening transaction costs should, however, not be overlooked.
7. While we agree with the need to improve the development control mechanism, our feeling is that the emphasis should be on greater efficiency in the system of development approval, rather than in strengthening control as such.

Recommendation 2: Improve residential land supply

8. We support the spirit of increasing residential land supply but are concerned with the practicality of some of the specific recommendations. For example, whilst we agree that the rezoning of industrial into residential land should be considered, due care must be taken to ensure that this would not create environmental problems.
9. On increasing supply in the urban area, we observe that the plot ratio in urban Hong Kong is already among the highest, and we are not certain how much more room there would be for further growth.

Recommendation 3: Balance housing supply and demand

10. In general we concur with the recommendations except for the modification of building convenants by specifying a time frame on availability of units. This would restrict the choice and freedom of the developer owners, as developers would be compelled to sell even though it would have made better economic sense to use the units for leasing or serviced apartments.
11. The move goes against the free market principle of Hong Kong. Although existing covenants require developers to comply with the completion dates, availability is a market issue rather than a legal matter. Hitherto the market is free with no control on timing and pricing. If control on timing is now introduced, a wrong signal will be sent to investors and Hong Kong's free market image may be jeopardised. Moreover, if timing and pricing were controlled, real estate development would become merely a construction job and there would be little incentive on quality and innovation.
12. Since government's policy in land disposal is to sell at the highest possible price, developers should be entitled to do likewise. The recommendation to control timing has been based on the assumption that developers are withholding flats, but we are not convinced that there is enough evidence of withholding.
13. In conclusion, forcing developers to release the flats against the market might be counterproductive. It would increase overall risk and hence further deter new entrants. As a measure that artificially creates a tougher market, it will only benefit the bigger players and will thus be anti-competitive in the end.

Recommendation 4: Enhance marketability of older and less accessible properties

14. We agree with this proposal. The main problem, however, may lie with a lack of qualified building surveyors to take this forward.
15. On property in less accessible areas, development is often put off by delays in the public works programme. A possible solution is to seek to have developers undertake the public works in exchange for some benefits, e.g. better terms in land premium negotiations.

Recommendation 5: Establish sector-specific rules

16. We note that the Real Estate Developers Association has already developed a code of practice on non-consent schemes. However, the REDA code is not mandatory and it applies only to REDA members.

Recommendation 6: Ensure fair competition

17. The issue of competition law is being considered separately by the HKCSI.

Recommendation 7: Transparency

18. While the development of more databases on property would be useful to the consumer, our view is that the private sector is already transparent and the burden of the problem lies with the government, there being a lack of efficiency in the planning and development process, e.g. in the appoval procedures of Lands and Building Departments.

(Ends)

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