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Opportunities and Risks of Capturing Land Values Under Hong Kong’s Leasehold System

Yu-Hung Hong and Alven H. S. Lam

November 1998, English

Hong Kong’s land-leasing system empowers the government to exercise two important land policy measures—regulating land supply and capturing development windfalls. This paper focuses on the evaluation of the effectiveness of this leasehold system especially in the areas of capturing development gains for financing urban infrastructure. The portion of development profits captured by the government was measured through an analysis of the official lease-negotiation cases. An average of 39 percent of the increased land value occurring between 1970 and 1991 was captured through leasing public land. These captured benefits plus other land related revenues accounted for 79 percent of the average annual infrastructure investment for the same period. Despite the success in capturing development windfalls, scholars and policymakers have engaged in a series of debates over the implications of this land-leasing method on property prices. The dual role of the government in regulating land use and negotiating land premiums may have created an institutional setting that has generated imperfect competition in the real estate market and encouraged property speculation. By undertaking an institutional analysis, the authors establish a causal relationship between the land-value-capture experience and high land and property prices in Hong Kong. The institutionally oriented explanation of high housing costs-which many analysts have neglected-would have important implications on policy recommendations for capturing development windfalls by leasing public land in Hong Kong and elsewhere.