Question

Discuss the roles of the property sector in the macro-economy with reference to Hong Kong.

Answer 1

The property market plays an important role in the Hong Kong economy. Housing is the most important form of savings for many households. In the banking sector, currently about half of domestic credit comprises mortgage loans for the purchase of private residential properties and loans for building and construction, property development and investment. Changes in property prices and rents influence consumer price inflation, and affect Hong Kong’s competitiveness. Land sales and stamp duties on property transactions have also been a significant source of government revenue.The economy can be affected by fluctuations in the property price through a variety of channels.Changes in property prices can influence private consumption and investment through wealth and balance-sheet effects. They also affect consumer price inflation via both direct and indirect channels, and can have a significant effect on Hong Kong’s competitiveness as an international trade and financial centre. The banking sector is susceptible to fluctuations in the property price due to its exposure to the property market. Finally, the fiscal position of the government may be affected via the revenue channel.
Property price and consumption
One much-cited mechanism through which changes in the property price influence consumption is the wealth effect. Since consumption spending depends, among other things, on households’ lifetime financial resources, and housing wealth is an important part of those resources, changes in the property price can be expected to influence consumption. For example, when the property price drops, so do lifetime resources, and consumption falls. Hong Kong’s context, the proportion of households owning private residential properties in Hong Kong is small relative to some other developed economies, implying that the wealth effect may be less significant in Hong Kong. Rough estimates based on the owner-occupation rate in the private residential sector and the latter’s share in the total housing sector suggest that about 35-40% of the households in Hong Kong own a private residential property. The share is significantly lower than that of over 70% in the US and UK, for example (Kennedy and Andersen, 1994). Nevertheless, the relatively liquid secondary market for properties and the well-developed financial sector suggest that the fungibility of housing wealth in Hong Kong should be comparable to that in other developed economies. In particular, the widespread practice Of using properties as collateral for consumer and business loans in Hong Kong point to the importance of the balance sheet and credit effects. The tightening of credit stance by banks in the wake of the Asian financial crisis in part reflected the much-reduced collateral value of properties, for example. Nevertheless, the relatively strong initial conditions in both the banking and non-bank private sector prior to the Asian financial crisis have helped to limit the disruptive impact of asset price declines on private spending.   Property price and inflation and competitiveness
There are a number of channels through which property market developments can influence consumer price inflation. One is through the direct impact on the housing cost component of the consumer price index (CPI). Secondly, to the extent that fluctuations in property prices affect private consumption and investment as discussed above, the resulting changes in aggregate demand may have an impact on prices of other goods and services. Finally, variations in property prices may also affect expectations concerning future movements in the price of other goods and services (including wages).
In Hong Kong, the rental component accounts for about 26% of the CPI basket. As a result, rental changes tend to have a significant effect on CPI movements, albeit with considerable lags due to 1-2 year rental contracts. Of the total decrease of 9% in the CPI from its peak in July 1998 to December 2000, the fall in the rental component accounted for 41/2 percentage points. The rental component continues to exert downward pressure on the CPI, but at an increasingly moderate pace, as the lagged effect of rental declines in the earlier years diminish. There were likely also indirect effects through changes in aggregate demand. These developments have helped to improve the competitiveness of the Hong Kong economy. The real effective exchange rate (REER) of the Hong Kong dollar has dropped by 13% from its peak in the third quarter of 1998, reflecting in large part declines in domestic prices of goods and services including rents relative to foreign price.   Property price and government fiscal position
Because land and other property-related income represent an important source of revenue to the government in Hong Kong, fluctuations in the property price may have a significant effect on the fiscal position. The share of land premia and stamp duties accounted for an average of 26% of the total revenue in the first part of the 1990s before the Asian financial crisis. The ratio has declined significantly in recent years to an average of about 14%, reflecting both lower land premia and stamp duties. The stamp duties dropped due to the weaker property price as well as lower transaction volumes. The decline in land premia also reflected both price and volume effects, including particularly the suspension of land sales for most of FY1998. The decline in land premia and stamp duties reduced the fiscal balance by about 23/4% and 11/2% of GDP in FY1998 and FY1999 respectively, compared with the average Property price and government fiscal position
Because land and other property-related income represent an important source of revenue to the government in Hong Kong, fluctuations in the property price may have a significant effect on the fiscal position. The share of land premia and stamp duties accounted for an average of 26% of the total revenue in the first part of the 1990s before the Asian financial crisis. The ratio has declined significantly in recent years to an average of about 14%, reflecting both lower land premia and stamp duties. The stamp duties dropped due to the weaker property price as well as lower transaction volumes. The decline in land premia also reflected both price and volume effects, including particularly the suspension of land sales for most of FY1998. The decline in land premia and stamp duties reduced the fiscal balance by about 23/4% and 11/2% of GDP in FY1998 and FY1999 respectively, compared with the averageProperty price and government fiscal position
Because land and other property-related income represent an important source of revenue to the government in Hong Kong, fluctuations in the property price may have a significant effect on the fiscal position. The share of land premia and stamp duties accounted for an average of 26% of the total revenue in the first part of the 1990s before the Asian financial crisis. The ratio has declined significantly in recent years to an average of about 14%, reflecting both lower land premia and stamp duties. The stamp duties dropped due to the weaker property price as well as lower transaction volumes. The decline in land premia also reflected both price and volume effects, including particularly the suspension of land sales for most of FY1998. The decline in land premia and stamp duties reduced the fiscal balance by about 23/4% and 11/2% of GDP in FY1998 and FY1999 respectively, compared with the average level in 1991-97.