RAFFLES INSTITUTION

2019 YEAR 5 TERM 3 COMMON TEST

Higher 2

ECONOMICS 9757/1
1 July 2019

1 hour 10 minutes
Additional Materials: Answer Paper

READ THESE INSTRUCTIONS FIRST

Write your name, index number and CT class on all the work you hand in.
Write in dark blue or black pen on both sides of the paper.
You may use a soft pencil for diagrams, graphs or rough working.
Do not use paper clips, highlighters, glue or correction fluid.

Answer all questions.

Answer each section on a fresh sheet of paper.

At the end of the examination, fasten answer script for Section A securely together with this sheet as
cover page.

The number of marks is given in brackets [ ] at the end of each part question.

Name: __________________________
Section A Marks
Civics Class: _____________________
_____________________
Economics Tutor: _________________ Question 1 /30

This document consists of 5 printed pages and 1 blank page.

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BLANK PAGE

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Section A

Answer all questions in this section.

Question 1: The Housing Market in Hong Kong

Figure 1: Hong Kong Private Property Price Index

Source: Federal Reserve Bank (St. Louis)

Figure 2: Market Share of Top Property Developers in Hong Kong

Sun Hung Kai

Other Firms Properties
30% 19%

New World
Development
18%
Cheung Kong
Property
9%
Henderson
Land
Development Sino Land
12% 12%

Source: Construction Economics and Building

Extract 1: Key Demand Drivers in Hong Kong’s Housing Market

The squatter houses reminiscent of the 1970s have recently emerged. Some of Hong Kong’s
deplorable living conditions such as “coffin homes” have recently gained much attention in
international media. Coffin homes are tiny subdivided units, some so small that a person
cannot even fully stretch out their legs.
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Despite this, buyers are still enthusiastic about entering the market. Externally, the slowing
pace of interest rate rises in the US has benefited Hong Kong’s housing market; while internally,
strong income growth and low unemployment seem to have raised demand for residential
properties. Speculative activities have also contributed to the strong market demand.

Many residents consider owning a home a top priority, and are willing to set aside a large
chunk of their income to achieve it. Parents are also doing everything they can to help the
younger generation, mindful that home ownership is an indicator of success and stability.

The global economic volatility did not seem to affect Hong Kong, resulting in record-breaking
prices that have in turn attracted foreign developers to grab a piece of the pie. Top local
property developers have seen their market share decline as bigger and richer mainland
players expand onto their turf, and smaller local developers have also competed more
aggressively. Overall, the total housing stock has also increased.

Source: Various

Extract 2: Evolving Market Structure in the Hong Kong Property Market

Some analysts commented that the entry of cash-rich Chinese property developers marks the
end of a Hong Kong property market dominated by a few local giants. Raymond Kwok,
chairman of Hong Kong-based Sun Hung Kai Properties, said on Tuesday that he is not
worried about fierce competition from mainland Chinese developers, and many rating
agencies concur as these property developers are forecasted to be most able to withstand this
competition. One reason is due to their cost advantages over other foreign developers,
including the long-term contracts that allow them to purchase materials at lower cost, and the
larger land reserves that they hold as collateral.

It is noted that the big five listed developers in Hong Kong are still collectively holding a
dominant position in the market. Moreover, the top five developers have been observed to
follow each other’s strategies closely, from the bidding of land to marketing moves.

Source: Various

Extract 3: Costs Considerations for Property Developers

Hong Kong property developers are feeling the pinch recently. According to the former head
of the Hong Kong Monetary Authority, the government has failed to increase land supply. This
has driven up land costs, leading to developers setting unaffordable home prices. The
government owns most of the land in Hong Kong and releases sites in phases based on
population growth projections.

Skilled construction workers are also in shortage in Hong Kong. The average construction cost
in Hong Kong amounted to US$3,704/m2 in 2017, up 6.2% year-on-year, according to global
project manager, Turner and Townsend. Labour was the single largest driver of inflation in
building construction costs, with the average hourly wage in Hong Kong rising to US$15 per
hour, up 25% year-on-year. Lam said that construction costs usually account for 20% of the
price of a residential flat.

Source: Various

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Extract 4: Solutions to escalating prices

Hong Kong’s dubious honour of having the world’s highest priced property puts private home
ownership beyond the reach of many. Instead, public housing is the main choice for young
low-income couples, the elderly, and singles hoping to purchase a flat. However, there is a
severe shortage of such homes. Public housing construction costs are highly subsidised by
the government. They currently house about 3.3 million people - 44.7% of Hong Kong’s
population. There are several schemes to purchase public housing at subsidised rates, but
with about 268,500 applicants on the waiting list, it can take more than five years to get a flat.

A number of civil servants are against the idea of price control or direct subsidies to help
residents struggling with a booming private housing market, saying they would backfire and
only worsen the city’s problems. Instead, the government has pledged to increase land supply
for the construction of new public flats.

Source: Various

Questions

(a) With reference to relevant case material, distinguish between fixed costs and [3]
variable costs.

(b) Identify the likely market structure associated with the property development [3]
industry. Justify your answer.

(c) With reference to Extract 2, explain two types of EOS experienced by Hong [4]
Kong’s real estate developers.

(d) i) With reference to Figure 1, describe the trend of housing prices in Hong [2]
Kong.

ii) Discuss whether demand or supply factors are more important in [8]
accounting for the price trend observed in Figure 1.

(e) Discuss whether price controls such as those proposed in Extract 4 would be [10]
the more appropriate way of responding to the rising private housing prices in
Hong Kong for low-income households.

[Total: 30 marks]

END OF PAPER

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Copyright Acknowledgements:

Figure 1 © https://fred.stlouisfed.org/series/QHKR628BIS
Figure 2 © https://epress.lib.uts.edu.au/journals/index.php/AJCEB/article/view/5232/6037
Extract 1 © https://www.businesstimes.com.sg/investing-wealth/property-development-lumps-bumps-and-slumps
Extract 2 © https://www.hkma.gov.hk/media/eng/publication-and-research/quarterly-bulletin/qb200208/fa2.pdf
Extract 2 © https://www.scmp.com/property/hong-kong-china/article/2022081/hong-kongs-top-developers-adopt-different-land-bank
Extract 3 © https://www.scmp.com/comment/insight-opinion/article/2069813/hong-kong-housing-built-serve-market-not-people
Extract 3 © https://www.dbs.com/aics/templatedata/article/generic/data/en/GR/012019/190114_insights_hk_property.xml
Extract 4 © https://www.scmp.com/news/hong-kong/politics/article/2139285/rent-control-subsidies-dismissed-hong-kong-well-build-
more?utm_source=Yahoo&utm_medium=partner&utm_campaign=contentexchange

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