Can increasing land supply suppress property prices?

Hong Kong has been the city with the most unaffordable housing price in the world for eight consecutive years. The government opined that it is due to insufficient land supply, and dismissed all other explanations, including monetary policy, mortgage policy or population policy. For example, in a recent public consultation, people are only allowed to choose from the 18 land supply options, by taking for granted that increasing land supply would solve the unaffordable housing price problem.

However, many citizens do not agree with the government’s views, and some NGOs have conducted questionnaire surveys and found that a large number of respondents do not think that increasing land supply can solve the problem of unaffordable housing price in Hong Kong [1].

The debate is in fact worldwide, there was a similar discussion in Australia last year [2]. Their economics professors and construction professionals also had disagreements on the causes of high housing price. The construction industry, with a vested interest, normally tend to support the theory of increasing supply for suppressing housing prices. Yet, some academics contended that only by increasing supply but ignoring demand will not help suppress housing prices. It is because the rise in housing prices in the past few years is precisely due to investment demand.

For example, Professor Hal Pawson’s contention is reported as follows: “Supply is only one side of the house price story, it is important to look at demand to try to moderate spiralling house prices. He says that high levels of investment and tax incentives like negative gearing are pumping up demand.” [2]

In fact, there have been some studies that have shown that the general rise in the global housing prices is related to the increase in global credit supply [3, 4], rather than insufficient land supply. For example, since the global financial turmoil in 2008, many central banks have cut interest rates and conducted quantitative easing, resulting in a global credit supply increases and thus a global housing price hike. It is illogical to impute the causes of high housing prices to insufficient land supply in a particular city, when the global housing prices* are co-moving together, which would be unlikely to be due to individual city’s land policy.

In early August of this year, the Economist (2018) analyzed the changes in property prices in 22 cities around the world. In the past five years, only two cities have fallen in housing prices, and the remaining 20 cities have experienced different levels of housing price hikes (Figure 1). The co-movements of global housing markets reflect that housing price increases were affected by global issue, such as low-interest credit growth and increasing volume of capital flows, instead of land supply problem of individual cities.

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Figure 1 The rate of change in housing prices in 22 cities around the world in the past five years, Hong Kong ranked 12th high (Source: author according to the Economist, 2018 data mapping [5])

The global housing prices trend does not only show the same direction, but some cities even have almost the same cycle frequency. For example, the annual change rates of the housing price indices of Sydney and London from 2006 to 2018 (as shown in Figure 2) are in very similar pattern. The amplitudes are not exactly the same, but the cycle frequency is unusually close. Two cities, one in Australia, one in Europe, their housing supply and housing demand are unlikely to be similar and almost impossible to have such a similar cyclical change rate due to independent local factors such as land supply. The cause of which must be something affecting both cities, the most likely candidate must be the foreign capital inflows which push up property prices by at least 3 means, including direct foreign purchases, direct or indirect credit supply and maintaining a low interest rate environment. (Richter and Werner, 2016 [6])

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Figure 2 Annual changes in the housing price index of Sydney (red line) and London (blue line), 2006–2018 (Source: authors produced from the data downloaded at Australian Government [7] and the UK government [8])

There have been many academic studies that have shown the effects of foreign direct investment or capital inflows on property prices. For example, Sa and Wieladek (2011) [9] about the United States housing market, Sa (2017) [10] about the United Kingdom housing market, and Fereidouni and Tajaddini (2016) [11]; Guest and Rohde (2017) [12]; Wokker and Swlerings (2016) [13] about the Australia housing market; Ghollpour (2013) [14] and Tillmann (2013) [15] about the housing markets in the Emerging Economies; and Yiu and Sahminan (2017) [16]; Chow and Xie (2016) [17]; Cheung et al. (2017) [18] about the housing markets in the ASEAN, Singapore and Hong Kong.

The effects of insufficient land supply on housing prices may be logically plausible in small economies such as Singapore and Hong Kong, but it is untenable if it is used to explain housing price hikes in Australia or New Zealand, where land supplies are ample. According to a technical report by the Auckland Council (2016), it found “that increasingly large changes in land supply are required to achieve [housing] price decreases. Hence, land supply per se is not sufficient as a policy for houses to become more affordable in New Zealand.” [19]

In fact, both Australian and New Zealand governments realized the effects of foreign capital inflows on housing prices, the Australian government decided to tighten the demand management policy on non-locals purchases on new housing last year. Similarly, the New Zealand government has also passed a bill restricting non-locals purchases of housing since August this year. (For details, please refer to my earlier article in Chinese [20]).

In contrast, so far there have been very few empirical evidence about the hypothesis that increasing land supply can suppress housing prices. But there are quite a lot of empirical studies that refute or cannot confirm this hypothesis. Besides the three studies that I have discussed in my 2015 article [21] that negate or question the hypothesis, another three academic studies about Hong Kong housing markets are also found to refute or fail to confirm the hypothesis.

The first paper is an international journal article [22] published by three scholars from the Department of Real Estate Development of the University of Hong Kong in 2016. It found no evidence to support the hypothesis that the government’s land supply had an impact on property prices. Instead, they found the reverse that housing prices affect the supply of land:

“By applying a Granger causality framework, we find this expectation unrealistic as there is no evidence supporting the claim that changing land supply via government land sale programme would impact on housing prices. However, it is found that housing prices do Granger-cause land supply Under the Application List System which implies that private sector is more responsive to market changes than the government” [22]

The second one is also an international journal article published by three scholars from the Hong Kong Polytechnic University in 2015 [23]. It asks “Is the insufficiency in land supply the root cause of insufficient housing supply? The empirical study in Hong Kong concluded that the amount of housing supply has nothing to do with the amount of government land supply! Increasing the supply of land to increase the supply of housing may not be effective, because developers can do everything possible to delay the sale of flats, so that housing supply and land supply are not synchronized.

“Analyzing time-series data, it is found that the new housing supply in Hong Kong is independent of the land supply by government, which means the policy of increasing land supply to increase housing supply may be ineffective.” [23]

The third one is also an international journal article published by two scholars in the Department of Economics and Finance of the City University in 2015 [24]. Their research found that increasing land supply does not necessarily increase housing supply, and the disparity between the rich and the poor can cause property prices to fail. burden:

“Consistent with previous studies, we confirm that directly increasing the land supply may not increase the housing supply. We also find preliminary evidence for widening income inequality, which, when combined with unavailability, can lead to unaffordability in the housing market.” [24]

In fact, this article also quotes another article published by two economists in the United States and Macau in 1999 [25]. It has been pointed out that developers are based on maximizing profits and that there is an oligopoly in Hong Kong’s private property market. If the increase in housing supply will affect the wealth interests of shareholders, they will certainly not implement it.

It must be known that supply and demand are not two completely independent variables, but with inextricably intertwined impacts on property prices. For example, two other recent studies have found that housing supply has not only failed to suppress housing prices, but has driven demand instead. It has even become the cause of unaffordable housing prices:

The first is an article by Bramley and Watkins (2016)[26]. They found that the supply of buildings will drive demand for buildings. As the increase in housing supply may lead to an increase in the composition of the family, the demand will increase and the increase in supply may not be able to suppress property prices. This is called “Circularity between Supply and Demand” in the research community. Bramley has published an article on housing development and family composition forecast in the UK since 1995 [27], pointing out that when a certain place increases housing supply leading families moving outside the district, the increase in demand becomes a self-fulfilling prophecy:

“… projections led to ‘circularity’, in effect a self-fulfilling prophecy that building X number of houses in a given location would result in that number of households moving to that location. They argued that ‘the projections approach to planning is misleading — it is in fact not based on a neutral assessment of housing need.’”[27]

(Full article in Chinese was published in HKEJ Monthly Oct 2018 [28])

— — — — — — — — — — —
EndNotes

*Two new articles on Global Housing Prices Co-movements have been written after publishing this article in the HKEJ Monthly. Their English version can be found at Yiu, C.Y. (2018a) Global Housing Prices Synchronization, Medium Dec 3. https://medium.com/@edwardyiu/global-housing-prices-synchronization-d48811bf7bba and Yiu, C.Y. (2018b) Global Housing Markets Downward Trend, Medium Dec 24. https://medium.com/@edwardyiu/global-housing-markets-downward-trend-f20830e1dbb1

References
[1] Greenpeace (2018) 62% of the public have no confidence to make the property price affordable, May 9, http://www.greenpeace.org/hk/press/releases/others/2018/planforhongkong /
[2] Holman, J. (2017) Housing affordability: Is more supply the answer to driving down prices?, ABC News April 25, http://www.abc.net.au/news/2017-04-25/is -supply-the-answer-to-housing-affordability/8470552
[3] Favara, G. and Imbs, J. (2015) Credit Supply and the Price of Housing, The American Economic Review 105(3), 958–992.

[4] Justiniano, A., Primiceri, G.E. and Tambalotti, A. (2015) Credit Supply and the Housing Boom, Federal Reserve Bank of New York — Staff Report №709, Feb. https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr709.pdf

[5] The Economist (2018) Global cities house-price index, Aug 9, https://www.economist.com/graphic-detail/2018/08/09/global-cities-house-price-index

[6] Richter, M. and Werner, J.G. (2016) Conceptualising the Role of International Capital Flows for Housing Markets, Intereconomics, 1–9. DOI: 10.1007/s10272–016–0593-z

[7] Bureau of Statistics (2018) Residential Property Price Indexes: Eight Capital Cities, May 2018, Australian Government. http://www.abs.gov.au/ausstats/abs@.nsf/mf/6416.0

[8] Land Registry (2018) Statistical data set: UK House Price Index: data downloads May 2018, UK Government. https://www.gov.uk/government/statistical-data-sets/uk-house-price-index-data-downloads-may-2018#download-the-data

[9] Sa, S,F. and Wieladek, T. (2011) Monetary Policy, Capital Inflows, and the Housing Boom, Working Paper №80, Globalization and Monetary Policy Institute, Federal Reserve Bank of Dallas, US. https://www.dallasfed.org/~/media/documents/institute/wpapers/2011/0080.pdf

[10] Sa, F. (2017) Effect of Foreign Investors on Local Housing Markets: Evidence from the UK, working paper, School of Management & Business, Kingís College London. https://www.kcl.ac.uk/sspp/research/economics/People/FIlipaPaper-June2017.pdf

[11] Fereidouni, H.G. and Tajaddini, R. (2016) Foreign Investment in Residential Real Estate in Australia, Housing Prices and Performance of Real Estate-Related Sectors, 22nd International Panel Data Conference, 28–20 June, Perth, Australia. http://businesslaw.curtin.edu.au/wp-content/uploads/sites/5/2016/07/panel-data-conference-foreign-investment-in-residential-real-estate-in-australia-housing-prices-and-performance-of-real-estate-related-sectors.pdf

[12] Guest, Ross S. and Rohde, Nicholas (2017) The Contribution of Foreign Real Estate Investment to Housing Price Growth in Australian Capital Cities (September). Abacus, Vol. 53, Issue 3, pp. 304–318. Available at SSRN: https://ssrn.com/abstract=3039755

[13] Wokker, C. and Swlerings, J. (2016) Foreign Investment and Residential Property Price Growth, Treasury Working Paper 2016–03, Australian Government. https://www.rse.anu.edu.au/media/1845323/Swieringa-Paper-2017.pdf

[14] Ghollpour, H.F. (2013) The effect of foreign real estate investments on house prices: evidence from emerging economies, International Jourrnal of Strategic Property Management 17(1), https://www.tandfonline.com/doi/abs/10.3846/1648715X.2013.765523

[15] Tillmann, P. (2013), Capital Inflows and Asset Prices: Evidence from Emerging Asia, Journal of Banking and Finance, 37, 717–729.

[16] Yiu, M.S. and Sahminan, S. (2017) Global Liquidity, Capital Inflows and House Prices in ASEAN Economies, International Real Estate Review, 20(1), 105–126.

[17] Chow, H.K. and Xie, T. (2016) Are House Prices Driven by Capital Flows? Evidence from Singapore, Journal of International Commerce, Economics and Policy, 7(1), 1–21. http://doi.org/10.1142/S179399331650006X

[18] Cheung, Y.W., Chow, K.K. and Yiu, M.S. (2017) Effects of Capital Flow on the Equity and Housing Markets in Hong Kong, HKIMR Working Paper #01/2017, Hong Kong Institute for Monetary Research. http://www.hkimr.org/uploads/publication/455/wp201701.pdf

[19] Auckland Council (2016) Land Supply Constraints and Housing Prices in New Zealand, Technical Report 2016/038, http://www.knowledgeauckland.org.nz/assets/publications/TR2016-038-Land-supply-constraints-and-housing-prices.pdf

[20] 范國威、姚松炎 (2018) 澳紐與中國房屋限購令的分別,明報8月17日,https://news.mingpao.com/pns/dailynews/web_tc/article/20180817/s00012/1534443404069

[21] 姚松炎 (2015) 請用科學證明樓價高企的原因,端傳媒9月12日,https://theinitium.com/article/20150912-opinion-yiuchungyim-propertyprice/

[22] Ling-Hin Li, Siu Kei Kelvin Wong, Ka Shing Cheung (2016) Land supply and housing prices in Hong Kong: The political economy of urban land policy, Environment and Planning C: Politics and Space Vol 34, Issue 5, 2016, http://journals.sagepub.com/doi/abs/10.1177/0263774X15614699

[23] Huang, J., Shen, G.O. and Zheng, H.W. (2015) Is insufficient land supply the root cause of housing shortage? Empirical evidence from Hong Kong, Habitat International 49, 538–546.

[24] Leung, C.K.Y. and Tang, E.C.H. (2015) Availability, Affordability and Volatility: The Case of the Hong Kong Housing Market, International Real Estate Review 18(3), 383–428. https://www.umac.mo/fba/irer/papers/current/vol18n3_pdf/05.pdf

[25] Lai, N. and Wang, K. (1999). Land-Supply Restrictions, Developer Strategies and Housing Policies: The Case in Hong Kong. International Real Estate Review, 2(1), 143–159.

[26] Bramley, G. and Watkins, D. (2016) Housebuilding, demographic change and affordability as outcomes of local planning decisions: Exploring interactions using a sub-regional model of housing markets in England, Progress in Planning 104, 1–35

[27] Bramley, G., Watkins, C. and Council for the Protection of Rural England. (1995) Circular projections : household growth, housing development and the household projections. London: CPRE.

[28] 姚松炎 (2018) 增土地供應遏樓價? 恐隔山打牛,信報財經月刊 499,10月

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ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

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