Government Land Supply and Housing Prices in Hong Kong: The Political Economy of Urban Land Policy

Abstract

With the government owning all land in Hong Kong, public land sales have been an important channel for developers to acquire land for property development, apart from private-led urban regeneration. For the colonial time before 1997, land was supplied to the market via a supply-oriented model, in which the government determined how much land to sell and when. The situation changed in 1997 when the administration found that they were being unresponsive to market conditions, and switched to a demand-oriented model that allowed developers to reveal their demand for land. In any case, there is a general expectation in the society that government urban land policy in supplying land plays a pivotal role in making housing affordable by the general working class. By applying a modified Granger Causality test, we find this expectation unrealistic as there is no evidence supporting the claim that changing the quantity of land supply via government land sales would impact housing prices, even when the demand-oriented model was used. This suggests that changing the model per se did not solve the affordability problem. Further analysis based on other sources of land supply reveals that land sales are too trivial to have any observable impact on the housing market. Yet, the political economy of the urban land market prohibits the government from selling more land to build housing, as most of the land she owns has no or restricted development rights.