The Economics of Urban Land Policy

As this is a more argumentative topic, extensive background reading is strongly advised.

What is Urban Land Policy - An overall view :

Urban land policy invariably targets at setting the optimal land use control to solve administratively the problems of externality and

to allocate the land to satisfy future social, environmental and economic needs, which to some extent may be mutually exclusive.

However, any format of state intervention, disregarding the intention, will upset the price mechanism for urban land in a free market

Davies (1977) suggests that the adoption of land use policy would trigger an immediate and sustained increase in prices due to increased costs and uncertainty.

Monk et al. (1991) list both the positive and negative effects of land use planning to land demand. On one hand, land use planning can improve the environment and provisions of infrastructure of the lots and thus enhance the view of developers of future land prices. However, it constrains the development potential and impose a cost

Dowall (1992) identifies three main ways that public land use policy would affect the land market:

(1) land supply constraints, (2) excessive plot-size standards and subdivision design, and (3) procedural delay. Restricted land supply, therefore, causes increase land price, excessive plot-size standards increases the cost of development and procedural delay make difficult for developers to respond quickly to changing demands.

An Australian Government report in the 70’s once listed the following agenda for urban land policies :

Objectives : 1) Better urban planning :

- to protect amenity, i.e. to limit negative external effects imposed by individual land users

- to prevent incompatible uses, but that involves the issues of private property rights

- to provide government services efficiently, since there is no market mechanism to discourage development in areas that are too expensive to service. By means of land use control, such preventive measures can be achieved.

- to decide about urban growth, i.e. the choice of continuous growth or urban area or by means of sub-urban centres and greenbelts.

- to coordinate long term investment, i.e. provide maximum market information on development potentials of urban areas.

- to redistribute welfare.

2) Lower urban land prices :

- “…if the price of land is high, it might encourage development at densities that are too high… many people who would prefer to live in a house at low to medium density are forced to live in flats, partly because of the high price of land…”

- high land price would also affect government provision of services on land.

- High land price tends to encourage speculation and unearned profit, and hence land banking.

- High land price will contribute to high inflation

Options : • )government ownership of land such that

additional land use conditions can be imposed

• )reducing administrative procedures and delays

• )provide cheaper finance for development for selected social groups

• )land price controls

• )capital gains tax/betterment/landholding tax

- Political factors :

- Government directs market operation with political reasons

- Public land banking- Urban redevelopment – land readjustment and

transfer of development rights

Compariosn of HOS and Private Flats Supply and Coorelation with Average MarketProperty Prive Level

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How would the private housing market be affected by public housing programme ?

Correlation Analysis of Changes in Transaction Volume, Property Prices, Supply of HOS, Supply of Private Flats and Stock Market Performance 1984-1999

Correlations

1.000 -.013 .217 -.001. .927 .103 .996

58 53 58 58-.013 1.000 .167 .234.927 . .231 .091

53 53 53 53.217 .167 1.000 .501**.103 .231 . .000

58 53 58 58-.001 .234 .501** 1.000.996 .091 .000 .

58 53 58 58

Pearson CorrelationSig. (2-tailed)NPearson CorrelationSig. (2-tailed)NPearson CorrelationSig. (2-tailed)NPearson CorrelationSig. (2-tailed)N

VOL

HOS

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STOCK

VOL HOS PRICE STOCK

Correlation is significant at the 0.01 level (2-tailed).**.

Government versus market in urban land policy :

- Neoclassical economic theorists would maintain that government intervenes into the market whenever there is alleged failure in the market mechanism, or where market costs do not reflect real costs to the society, where eg. fragmented ownership of land may lead to blight of development, uncoordinated design and over-supply or the existence of externalities,

- there are always counter-arguments on the discouragement of such unjustified government action

- These counter-arguments range from interference to individual liberty

- to the premise of “government failure”, - to a more structured theory of the

contestable markets where so long as “complete redeployability” exists, there is no need for government intervention irrespective of the non-existence of a large number of firms.

- “excessive emphasis on market-type flexibility may lock firms and industries into existing products and routine production”. When this happens, the state becomes the final resort to break it through One cannot possibly avoid government intervention of any form

Perceived government behaviour and the Real Estate

Market in Hong Kong There is a distinct difference between the role of

government intervention and involvement in the urban land and housing system before and after the reunification of Hong Kong and Mainland China in July 1997.

The HKSAR government was trapped in a transitional situation from where few people could afford a decent flat to where few people are willing to purchase a flat.

That sometimes market expectation in the pattern and format of the government intervention can be more devastating than the actual act of intervention.

Testing the impact of government behaviour :

Hong Kong runs a mostly intriguing experience of operating a planned socialist land economy within the macro framework of an open capitalist system, by means of a leasehold land tenure system.

State intervention has never been out of the scene despite of the government’s claim of the so-called “active non-interventionist” approach.

What matters, therefore, is the perception and mode of state intervention presented to the market.

The following gives a very brief account of the change of such a perception and mode of intervention at different stages of the Hong Kong property market.

This will be tested as dummy variables to examine the extend of the effects.

The test period covers the whole of property cycle from 1990 when market prices began to rise until end of 1999 where price level went down for 40-50% compared to the height in 1997.

 

1)                  December 1992 7,469 flats in 24 blocks under seven

HOS projects located in the remote area of the urban fringe were on sale.

This lot of HOS flats offered 45 per cent discount, the largest discount in 10 years. The price of flats were about a third of the current market price (1992) of comparable flats in private developments in the same area.

2)                  December 1995 Government adjusted the conditions of consent for

the pre-sale of uncompleted residential flats:  

• Extended the pre-sale period for uncompleted flats to 12 months prior to the estimated completion date from the current nine months.

• Allowed deposits paid by buyers to be about 10 percent of the average price of all flats offered rather than exactly 10 percent of the price of a particular flat.

• Developers needed to conduct only one balloting for any pre-sale, with unsold flats offered to the public on a first-come, first-served basis after the initial release. Under the previous arrangements, developers were required to conduct balloting until 80 per cent of the units in a pre-sale were sold before they could sell the remaining units freely.

3) October 1997 (Long Term Housing Strategy)

-         Government pledge to target market supply of not less than 85 000 residential units a year of which the Government and private sectors will provide 50,000 and 35,000 respectively, starting from 1999.

-         The society as a whole will achieve a home ownership rate of 70% by 2007. In year 1997 the home ownership rate was 52 per cent (Census and Statistic Dept, 1997).

-         Reduce the average waiting time for public rental housing from six years to three years by year 2003.

 

4)                  June 1998

Intervention in the Land Market Mechanism :

Government took a drastic move to suspend its land sales program from June 1998 to end of March 1999 in an effort to stabilize the market.

5)                  September 1998

Government re-adjusted two anti-speculation measures on the property market in end of 1998 which :

-Removed the minimum 20% on the total purchase price that buyers had to pay after signing the formal transaction agreement. Thus, home buyers would not need to put down a sizable amount of money in advance to pay for the 20% down payment in the interim period before they could secure mortgage loans from banks.

-Reduced the amount of deposit a property buyer had to pay upon signing a preliminary agreement form 10% to 5%.

6) February 1999

Government released the resale restriction period to five years instead of 10 years for Government subsidized housing in the open market. It included flats purchased under the Home Ownership Scheme (HOS) and Private Sector Participation Scheme (PSPS).

The sales were subject to payment of a premium proportional to the original discount given by the government. Consequently, more than 80,000 Home Ownership Scheme flats over five years old were to be released to the open market.

Defining Variables :

Private residential property price index (PRPI) series from the first quarter of 1990 to the third quarter of 2000 (a total of 43 quarters) used as the dependant variable.

1)        area of property not exceeding 39.9sq.m 2)        area of property between 40-69.9.sq.m 3)        area of property between 70- 99.9 sq.m 4)        area of property is 100sq.m and above.  

For testing independent variables, they are:   1)Unemployment rate (UR) – the average rate of

unemployment in every quarter of years. 2) Nominal interest rate (NIR) – measured by the

quarterly average of prime lending rates. 3)Gross domestic product (GDP)- the economic

growth measured by the quarterly gross domestic product at constant 1990 market prices.

4) Total supply of completed residential units (TSR) – measured by the quarterly average supply of completed residential units including government subsided sale units and private units.

5)Total supply of Government subsided sale units (HOS)- measured by the quarterly average supply of HOS.

6)Consumer price index (CPI)- measured quarterly and it uses 1990 as the base year, e.g. 1990=100.

7)Other dummy variables represented different Government policies. (L and S variables denoting long term and short term effects

S92 = 1 for periods after the third quarter of 1992

S92 = 0 otherwise S95 = 1 for periods after the third

quarter of 1995 S95 = 0 otherwise S97 = 1 for periods after the third

quarter of 1997 S97 = 0 otherwise etc….

L92 = S92 multiply (t-12) L95 = S95 multiply (t-24) L97 = S97 multiply (t-32) L98A = S98A multiply (t-34) L98B = S98B multiply (t-35) L99 = S99 multiply (t-37) where “t” is the relevant quarter.

Data Date of transaction

Variable S92 Variable L92

Property X Dec. 1992 1 0

.

Property M Dec. 1994 1 1 x (20-12)=8

.

.

.

.

Property Y Aug. 2000 1 1 x (43-12)=31

Results :

The coefficient of determination (R²) is 0.989 showing the model dose fit the data well and the PRPI have a high degree of correlation with all those independent variables that are used in this analysis

variables Unstandardized Coefficients - Beta

t Sig.

(Constant) 205.999 .975 .339

T 12.940 1.954 .062

Unemployment Rate -12.656 -1.564 .131

NIR -9.393 -1.821 .081

GDP 3.697 4.438 .000

TSR 2.037E-04 .301 .766

HOS 1.456E-03 1.617 .119

CPI -3.808 -1.800 .084

L92 -39.781 -3.170 .004

S92 2.196 .627 .536

L95 -45.140 -3.653 .001

S95 9.765 3.103 .005

L98A 46.600 1.589 .125

L98B 52.895 2.106 .046

S98B 70.350 2.613 .015

L99 6.097 .214 .832

S99 -.419 -.021 .984

L97 3.191 .198 .845

S97 -100.025 -5.151 .000

The dummy variable L98A is excluded completely from the final result as it contributes little to this model.

L98A is designed to estimate the long-term effects of Government’s reaction to the falling prices in suspending land sale for the first time in the history of Hong Kong for 9 months between June 1998 and March 1999.

There was no effect as the impact on market supply would only be obvious in at least two years for completion of buildings.

Due to inconsistent and sometimes confusing government behaviours concerning various housing policies (which exhibit a stronger significant level) that followed this temporary suspension of land sale, the effect became minimal.

In the similar way, the positive but not significant coefficient for S98A which suggests that the 1998 the Government policy of the suspension of the land sale does not produce an immediate market effect as far as stabilizing falling property prices is concerned.

 

The significantly negative coefficient of S92 implies that in the year of 1992 when the Government first introduced its 7,500 HOS flats on the property market for sale to beat spiraling property prices, it resulted an initial substantial decrease in private housing prices.

However, the positive but relatively insignificant coefficient for L92 suggests that it did not have major impact to the property prices thereafter. Hence this action only gave market an immediate psychological impact.

 

The coefficient for S95 is significantly negative, and the coefficient of L95 is significantly positive.

This suggests that the 1995 policies on relaxation on anti-speculation conditions resulted in an initial decrease in private housing prices when the policy was first announced.

This may seem unusual as one may regard such policy as positive to the market.

However, when we take this action together with the Task Force Report conducted by the government a year early, the situation can be explained.

In 1994, the Lands Department set up a task force to look into the market situation , and in particular over-speculative activities.

After a high-profile report by this task force was produced, several action recommendations came including increasing supply of land and making speculation more costly in the market.

This caused a mild halt in the property price movements temporarily. However when the market found out that this was just another lib service from the government in curbing speculation, the significantly positive coefficient for L95 implies that while the initial negative effect dampened off over time.

 

Both coefficients for S98B and L98B are significantly positive.

This result recommends that when the two anti-speculation measures on the property market were first removed in 1998, it caused a significant initial increase in private property prices and the impact remained in the market persistently thereafter.

 

The coefficient for both S99 and L99 are insignificant.

This leads us to conclude that the 1999 policy on releasing the government-subsidized housing development, HOS resale restriction did not have significant impact on private housing prices.

What is more interesting is that after the crash of the property market, major developers and some analysts started to blame the government for allowing this subsidized housing development to exist when the market price has fallen to an affordable level.

They also claim that the supply of HOS flats pose as a competition in the market that caused substantial mis-match in demand and supply leading to falling prices.

What they seem to have forgotten is that there is a strict income ceiling on the qualification of prospective purchasers of the HOS flats, and hence there is no free entry to this sector. As a result, the degree of competition with the private sector is very questionable.

 

The coefficient for S97 is positive but not significant, while that L97 is significantly negative.

This implies a very interesting picture. When the Chief Executive announced this policy target, the market was still at the very peak and financial crisis was still remote to the investors in the housing sector.

As the myth of a never falling market still went on, most people would not regard this target as detrimental.

However, when market started to collapse, that the housing policy of supplying 85,000 units of flat each year, even most people know that the government cannot possibly enforce this supply target, became a burden on market sentiment.

When more and more senior government officials came out to the public to defend this target, the effect changed from purely psychological to substantial.

 

It is also interesting to see that on other macro economic variables, only the gross domestic product (GDP) has significantly positive impact to the private property prices (PRPI).

Housing supply, both private (TSR) and public (HOS) are insignificant in explaining the PRPI when comparable to government action variables.

Market sentiment has been dominant in the property market due to the inefficient nature of the property market.

Because property market tends to exhibit weak form of market efficiency, investors and purchasers do not find it easy to have comprehensive information to rely on, except market sentiment.

Market sentiment, especially in a market where government has a monopoly power in supply of land, would be subject more to the attitude and expected behaviour of government policy.

 

Public land banking Approach - the case of Netherlands

• The Dutch planning system is based on the principle of legal certainty with the full legal backing.

• It is therefore an integrated planning and control mechanism by which application must be approved if the development proposal satisfies the planning requirements.

• As local governments in the Netherlands actively purchase and resell in the land market, this role enhances development certainty for the private sector.

- ensure the increase in land values resulting from urban development activities return to the community by enabling the purchase of potential development land in advance of requirements and at low costs

- to promote inexpensive release of land suitable for development (especially ordinary housing projects)

• In addition, due to the timely process in revising the local plan, a special feature of flexibility in the Dutch system is to allow the local authority to act as if a new plan were in place by “declaring its attention” for the preparation of a new plan.

The land readjustment schemes ( in Germany, Sweden, Turkey , Japan and Taiwan)

- also known as re-plotting (it refers to the redistribution of pre-adjustment sites minus contribution lands for public facilities and reserve lands to individual landowners as “replots”. All existing rights and interests from previous sites are transferred to newly-replotted sites)

- consolidate land that is fragmented in ownership and then repartition to create serviced plots for development

- to encourage supply of land and to improve the quality of service provision in already developed area.

- The authority may retain part of the re-adjusted land to help pay for the costs or to provide public amenities

- It has the following characteristics :- Comprehensive development package- Landowners receive equitable

development benefits, while bearing equal proportion of costs and risks

- Participation of all landowners- Development costs are lower than other

types of redevelopment- Residents of the project area are able to

retain their normal daily lives to a larger extent

The Transfer of developments rights (the American model)

- local government prepare land use plan that specifies percentage of remaining undeveloped as preserved open space

- local planning board would prescribe the number of development rights required for each housing unit to be developed. The local planning board would then issue the total amount of development rights required within the land use plan allowance

- every owner of preserved open space land would receive certificates of development rights in an amount that represents the percentage of assessed value of his undeveloped land to the total assessed value of all undeveloped land in the locality

- an owner of developable land would have to purchase additional certificates of development rights in the open market in order to increase intensity of development

- hence, owners of preserved open space would be compensated by this trade while their land can still be preserved without any capital costs to government.