There Is NO High Or Low Land Price Policy

Stephen Chung

Managing Director

Zeppelin Real Estate Analysis Limited

October 2004 

Recently government land auctions appeared to have brought in some rather good (high) prices for land, thus sparking (again) in the some quarters that the government has gone back to using a high land price policy. However, your humble author tends to see it this way: while the prices fetched are high (by recent years・ standard anyway), this does not follow that there is a high land price policy. What the government does is that it is selling its land like any private-market landowner does and that is to seek the highest bid for its assets, in short a market-based behavior though in some ways intentionally or unintentionally the government may via various urban planning and building regulations render the land cost a significant portion in real estate prices (but this is another story for another day or readers may go read our past article for clues = Whether this inclination is a good thing or a bad idea economically, socially, administratively, taxation-wise, and the like remains a debate for academics and experts.

In any event, the high land price argument is technically questionable and here is why:

a)      Ultimately it is the purchasers・ pool that determines the prices of real estate = if one feels that real estate prices are utterly high, one simply refuses to purchase. If sufficient number of potential buyers feel the same way, real estate prices are unlikely to shoot up significantly, and vice versa. This also involves the particular .one・ investor・s confidence in him/herself and whether his or her market views eventually prove true. Confident investors tend not to follow the crowd provided they feel their investment views would hold true ultimately. The point here is IF the market is so easily manipulated, it deserves to be manipulated = don・t blame anyone else or any policy for that matter.   

b)      High land prices do NOT lead to high real estate prices = while land prices (costs to the developers-landowners) are a significant factor in gauging whether a real estate project will procure a profit, the prices that the completed property can be sold bear little reference to the production factors including land cost. Real estate prices relate more to economic performance and earning power. IMPORTANT HYPOTHESIS = even if the government gives out land for free, real estate prices will still be more or less at the level they are. The reason is simple, if I were a real estate developer, and I know that the average real estate purchaser can afford HK$X to purchase a home, why should I charge (much) less than HK$X just because I have obtained the land for free? I would simply pocket the sum that might have been paid for the land unless the government restricts the real estate prices that can be charged to buyers in the land lease terms and conditions.

c)      Not buying real estate or NOT being a homeowner is NOT life-threatening = your humble author does think that most people would benefit from buying their own home, yet does not see this as a must in one・s life journey. Nor does he deem it necessary in case one wishes to marry and form a family, what・s wrong with just renting? Provided one・s financial planning is well done, there may not be a need to own (much) real estate.

d)      One can also participate in real estate via funds or REIT = though the latter has yet to be seen in Hong Kong, these exist in other parts of the world and could be an alternative to owning real estate direct.

The higher real estate prices seen in Hong Kong has more to do with our having a GDP per capita of US$23,000 (comparable to most western countries such as Canada, Australia etc), a general keenness for making money and investment, and perhaps a cultural inclination for real estate / land. The last thing that drives up real estate prices is a government initiated policy.

Notes: The article and/or content contained herein are for general reference only and are not meant to substitute for proper professional advice and/or due diligence. The author(s) and Zeppelin, including its staff, associates, consultants, executives and the like do not accept any responsibility or liability for losses, damages, claims and the like arising out of the use or reference to the content contained herein.  

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