For the property market, it is obvious that if there is a bottleneck or an imbalance in the supply of land, we have to deal with it. But the factors affecting demand, supply and prices of properties are very complex. Sometimes property prices rise not because there is a shortage of residential flats to satisfy housing demand, but because people expect that the market will continue to rise making it better to buy now to reap short-term profit or hold on for bigger gains in the long run. Currently in Hong Kong, the rapid surge in luxury-property prices may not necessarily be caused by insufficient supply of high-end residential flats, since rentals have not moved up in proportion with the prices. Actually, the increases were caused by the fact that many investors, including those from Mainland China, were optimistic about the outlook for future prices. 9. Apart from regulating the supply of land, another method that has long been used in Hong Kong to reduce the risk of bubbles in the property market is for banks to act as gatekeepers in preventing sharp increases in mortgage lending. The regulatory measures implemented by HKMA on 23 October that tightened the loan-to-value ratio for luxury  2  BIS Review 167/2009  properties priced at $ million or more to 60% serve this purpose. Some may argue that since many buyers of luxury properties are wealthy, they may not need to apply for mortgages and therefore the HKMA’s measures may not have the expected effect.
We experienced an economic contraction for five consecutive quarters and property prices plunged by more than 60%. Many families found themselves trapped in “negative equity”, and the unemployment rate was above 8%. Hong Kong began to recover in 2003 after six years’ hard struggle. I am sure that this experience is still fresh in our memory. 4. Japan is another good example. It enjoyed rapid economic development after World War II, quickly becoming a powerful industrial nation. During the late 80’s when its stock and property markets were booming, a huge bubble was created, which we only realised afterwards. Few people spotted the emergence of a bubble at the time, and the extraordinary and irrational exuberance was interpreted as the “Japanese miracle”. We all know now that what a disaster this “Japanese miracle” was for its people. Twenty years on, the Nikkei Index still hovers around the 10,000 level, only a quarter of its peak of 39,000, while the average residential land price in six major cities is equivalent to only a third of its level two decades  BIS Review 167/2009  1  ago. Of course, there are other structural problems that have prevented a Japanese recovery for such a long period. 5. The current global financial crisis was caused by the bursting of the property bubble in the US, which left many financial institutions under stress.