Many commentators wrongly describe Hong Kong's policy of auctioning off land a "high land-price policy." They observe that what Hong Kong people save by way of income tax they are paying to the government and the developers by way of rent or housing prices because of this policy. Yet to be fair, Hong Kong's high housing cost is not really due to a deliberate policy. Indeed Hong Kong's housing prices are high for a good reason: which is simply that Hong Kong is a very attractive place, and it is a very small place with a big population. If Hong Kong were not attractive, people would not be willing to pay heavy sums to own a piece of Hong Kong.

Hong Kong is attractive not only because its infrastructure is good and its society is politically stable and distinguished by a low crime rate. People in Hong Kong can live in safety and peace in a world often marred by turmoil. Hong Kong is attractive also because its tax rate is very low. Indeed Hong Kong's tax rates are among the world's lowest.

The mainland is now said to be considering the introduction of a tax on real estate. I think that is an excellent idea - not because this will cool down the red-hot property market, but because if the mainland follows Hong Kong and lowers its direct taxes dramatically along with its introduction of a tax on property that effectively targets land rent, then the mainland should become an even more vibrant economy.

Some people point to Singapore, saying that Singaporeans generally enjoy low housing costs. This is true. Singapore largely pre-empted private developers by providing housing for most of its citizens. Overall Singapore's performance is very impressive, and Hong Kong may indeed want to learn from Singapore in many ways. But Singapore did not achieve low housing costs by doing away with the tax on property, but by direct intervention. The government is producing housing units for qualified Singaporeans to purchase. I have argued that the SAR government will do well to relaunch the HOS housing program. But with a much higher population density higher than that in Singapore, so long as Hong Kong leaves the private market to produce housing for those who can afford it, Hong Kong's housing cost will still be high.

Some commentators point to a recent land auction in which the auctioneer threatened to withdraw land from sale when developers failed to meet the unannounced reserve price set by the government as evidence for a high land price policy. But even if the land price had been lowered, it does not follow that developers would pass on the savings to buyers. It would merely translate into fatter profits for the developers. Trying to get a price that reflects true market value is an act to protect the public interest, and a piece of evidence showing that the government and the developers are not a clique: there is no transfusion of benefits from the public to the developers, as many had been led to believe.

Hong Kong's housing prices can indeed be lower if the government supplies much more land for development creating a glut, as happened in 1998-2000 following the implementation of the 85,000 units a year production target. But this would hurt everyone, and would not make economic sense. In the end, wealth was arbitrarily taken from some people and effectively transferred to others.

Land is a scarce resource, and in a big city like Hong Kong, we would not want excessive development encroaching upon our country parks and our harbor; nor do we want mega buildings that house a lot of people but block the sky and stop air flows. Hong Kong's housing prices should be high to reflect its very high value, and development control to keep housing development compatible with sustainable development in allowing sufficient breathing space and amenities for the urban population is necessary.

Economic prosperity with scarcity of land will guarantee that housing prices are high. If the government does not tax the land rent that arises because of economic and social development private parties will pocket it. On the other hand, if the government does not try to derive revenue from land rent, it will have to find alternative revenue sources. Inevitably taxes on incomes and perhaps consumption and other economic activities will have to be taxed at higher rates. That will inevitably reduce the attractiveness of the place, leading to lower housing and land prices. But is this what we want?

The government should not artificially boost land prices. But if the government is efficient and keeps taxes low, land prices will rise. This is simple economics in a world with mobile capital. Hong Kong people can ask the government to help those with modest means to live in housing that meets certain minimum standards. But Hong Kong people should not expect that this will drastically bring down property prices.

The author is Director of the Centre for Public Policy Studies, Lingnan University.

(HK Edition 06/29/2010 page2)